Goldman Sachs: Common vs. Preferred Stock
If you like Goldman Sachs (NYSE:GS) but find the common stock too volatile, then consider its preferred stocks. They have four different issues that trade on the New York Stock Exchange. Depending on the platform used the symbol for the Series A might be GS/PRA, GS+A, GSpA or some other variation. They are all thinly traded, so limit orders would be recommended.
The preferred issues trade at yields above the 30-year treasury yield. Could it be that preferred and fixed income holders decided they needed increased yields to compensate for the increased risks?
Here are the four preferred issues:
GS Series A: Currently pays a $0.9375 annual dividend for a current yield of 4.98%. The stock is at $18.84 and is callable at $25.00.
Dividend rate calculation: 3 month LIBOR + 0.75% with a 3.75% floor. Earliest redemption date is April 25, 2010. Redemption value $750 million.
GS Series B: Currently pays a $1.55 annual dividend for a current yield of 6.21%. The stock is at $24.96 and is callable at $25.00.
Dividend rate calculation: 6.20% per annum. Earliest redemption date is October 31, 2010. Redemption value $800 million.
GS Series C: Currently pays $1.01 annual dividend for a current yield of 4.93% the stock is at $20.47 and is callable at $25.00. Earliest redemption date is October 31, 2010.
Dividend rate calculation: 3 month LIBOR + 0.75% with a 4.00% floor. Redemption value $200 million.
GS Series D: Currently pays $1.01 annual dividend for a current yield of 5.29% the stock is at $19.09 and is callable at $25.00.
Dividend calculation rate: 3 month LIBOR + 0.67% with a 4.00% floor. Earliest redemption May 24, 2011. Redemption value $1,350 million.
Could the preferred issues be called?
Possible, but not likely given the current capital allocation practice. During 2011, $6.04 billion was used to repurchase 47 million shares of common stock. That is more than enough to have retired its class A, B, C and D preferred issues. According to the more recent 10-Q its total redemption value is $3.1 billion. This would have left $3 billion and increased income available to common holders by $35 million a quarter or roughly $140 million annually. That works out to an increased net income available to common shareholders of roughly $0.24 per common share. That is a ten-year cost saving of $1.4 billion.
The more recent 10-k filing by Goldman Sachs shows that, as of December 2011, it may repurchase up to 63.5 million common shares.
The stock closed May 15, 2012 at $99.97 making the treasury shares underwater by $11.160 billion. The decline in value of the treasury stock dwarfs what it would cost to retire the four classes of preferred stocks. 310,087,747 shares were held in treasury at a cost of $42.281 billion, or an average cost of $136.35.
Risks and Opportunity:
The current yield on the Goldman preferred issues suggest some concern by the market. If one liked Goldman Sachs and wanted a less risky exposure then the preferred issues might have some interest. The preferred dividend income could be used to build a position in the common stock. Or if a preferred issue was redeemed then the proceeds could be reinvested in the common. Just a thought.
Source: 10-k filing
Disclosure: I am long GS Preferred issues.