by Roger Choudhury
Recently, the Treasury's seven-year note auction came at a record low yield of 1.203%. This is mostly due in part to a flight to safety as concerns mount of economic slowdowns in the US, China, and Europe. As such, eyes will focus on the payroll numbers to be released on Friday, June 1.
To continue to grow the value of your investments, I recommend that you consider adding more preferred stocks to your portfolio. You are better off collecting dividends over the next couple of years and selling shares at higher prices, instead of watching your equity get halved. Here are some tax-advantaged preferred stocks that I suggest for semi-aggressive investors:
Bank of America Merrill Lynch (BAC) (6.25% Non-Cumulative Perpetual Preferred Stock, Series 7)
Recent Price | $22.69 per share |
Callable? | Yes, at $25 per share, since Mar 2010 |
Dividends | $0.390625 per quarter Next dividend payment is on Jun 29 Record date is on Jun 15 |
Current yield | 6.9% |
S&P Rating | BB+ |
Ticker symbol (Yahoo! / Google / Fidelity) | BML-PO / BML-O / BML/PO |
At the end of the first quarter of 2011, the ratio of earnings to fixed charges and preferred dividends stood at 1.09. This is barely adequate, but I will focus on big picture. Bank of America has cut interest expenses by 58.3% since 2007. The firm posted a loss of $230 million in 2011, after being in the red for $1.323 billion in 2010. First quarter results showed a profit of $653 million, after a debit valuation adjustment. Also, consider that preferred dividends total to $211 million annually. Because of the positive trend in earnings, I conclude that Bank of America should continue to make dividend disbursements over the next couple of years, at least.
Significant headwinds await Bank of America over the coming few months. Economic indicators paint an ominous environment. The Eurozone composite PMI fell in May to 45.9. The services PMI declined to 46.5, which is the lowest reading in seven months. Also, the manufacturing PMI went down to 45.0, the weakest in almost three years. This is bad news for China, which sends a chunk of its exports to the EU, as well as for the US, which has had a revival of its export portion of the economy due in part to willing buyers in the Europe.
Given these data and expectations, I do not expect the share price here to go above $23.50 for the next few months. Additionally, what should happen is that the share price falls toward $18, as the US falls into negative growth territory for one quarter in the fourth quarter of 2012 or first quarter of 2013. I only suggest that you purchase shares if you intend to hold onto this for at least eighteen months. In the short term, I expect this to dip below $22.50, post-jobs report. After then, would be a good entry point.
Morgan Stanley (MS) (Floating Rate Depositary Shares Series A Non-cumulative Preferred Stock)
Recent Price | $16.97 per share |
Callable? | Yes, at $25 per share, since Jul 2011 |
Dividends | $0.252780 per quarter; Greater of the 3-month US Dollar LIBOR on the record date plus 0.70% or 4% Next dividend payment is on Jul 13 Record date is in the final week of Jun |
Current yield | 5.9% |
S&P Rating | BB+ |
Ticker symbol (Yahoo! / Google / Fidelity) | MS-PA / MS-A / MS/PA |
The ratio of earnings to fixed charges and preferred stock dividends is 1.0. This is a fall from 1.8 at the end of 2011. First quarter earnings came in at a GAAP loss of six cents per share. Morgan Stanley also has a debt to equity ratio of 3.38. On the surface, these data points make me wary, yet consider that in 2007, this figure was 6.32. Also, you must consider that revenues took a hit of $2 billion due to a debit valuation adjustment [DVA]. Excluding this accounting rule, net revenues were $8.9 billion and income from continuing operations was non-GAAP $0.71 per share. In comparison, Citigroup's (C) first quarter revenue rose to $20.7 billion from $17.2 billion in the fourth quarter and $20.0 billion in the first quarter in 2011, excluding DVA for all periods. In general, the financial services industry posted versatile first quarter earnings and revenue growth. So, I believe that Morgan Stanley has enough of a cushion to make dividend payments over the next couple of years.
The share price has had a marked decline in May, mainly because of the adversity that the firm faces in its investment banking section in a slowing global economy. This may rally above $17 in the coming days, but should again fall below this price post-jobs report. You may be better off waiting until then to buy this. I believe that pure income investors should steer clear of this due to its distance from par value, but semi-aggressive investors should find this attractive due to its hefty dividend.
US Bancorp (USB) (Depositary Shares Non-Cumulative Perpetual Preferred Stock, Series A)
Recent Price | $783.75 per share |
Callable? | Yes, at $1000 per share, since Apr 2011 |
Dividends | $8.75 per quarter Next dividend payment is on Jul 16 Record date is in the final week of Jun |
Current yield | 4.5% |
S&P Rating | BBB+ |
Ticker symbol (Yahoo! / Google / Fidelity) | USB-PA / USB-A / USB/PA |
The ratio of earnings to fixed charges is an impressive 3.99. Also, preferred stock dividends only amounted to $168 million. Fixed charges have declined by 59.8% to $2.618 billion. At the end of 2011, net income was at $4.872 billion, returning to 2007 levels. The tier 1 capital ratio was a healthy 10.6% in 2008 post-Lehman, and it stood at 10.9% at March 31, 2012. I conclude that your preferred dividends should be paid out for the next four years, at least.
However, everything is not as rosy as it seems. The Consumer Financial Protection Bureau [CFPB] wants to regulate prepaid reloadable debit cards. These cards are a way to make up for capped fees lost due to recent legislation. US Bank offers such a product to teenagers. JP Morgan (JPM) is rolling out its Liquid reloadable cards at branch locations. Also, Wells Fargo (WFC) offers a similar product online.
Ultimately, I believe that the CFPB and the banks will work out a way where transparency and revenue can be promoted hand in hand. Such a product is attractive to low income earners, the undocumented, and the underbanked. Banks gain when such consumers are brought into the folds of utilizing the formal financial system, and avoiding high interest loan sharks. This new revenue source is another reason not to shy away from banks' financial securities.
Here, the share price has traded relatively stable compared to other preferreds, and I like it for that reason. The lower yield is a sacrifice that is worth it. This may drift below $760 over the next few months due to the troubles abroad. In the short term, this should hover around $780, so there should be a good entry point soon. Because this is thinly traded, I strongly advise that you try to put in a limit order between $775 and $780.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
