Morgan Stanley (MS) closed June 13th at $13.65 with its Series A Preferred Stock (MS-PA) at $16.46. The preferred stock is better value. Here's why:
The preferred dividend is the higher of the three-month U.S. Dollar LIBOR + 70 basis points or 4.00%. At current levels, it is trading with a 6.07% yield (Source data: Series A prospectus). The common stock currently pays $0.05 a quarter for a 1.46% yield. The preferred may be redeemed at $25.00, but has no maturity date.
Morgan Stanley has roughly $1.1 billion outstanding of the Series A Preferred Stock and has $1.6 remaining on a share repurchase plan. Redeeming the preferred stock would add more value to common shareholders than the repurchase of common shares.
Morgan Stanley had 1,978 million common shares outstanding, as of April 30, 2012. The $1.6 billion remaining on the share repurchase plan could repurchase 117 million shares at the current price of $13.65 This could reduce the share count to 1,861 million shares. If one assumes earnings of $500 million then earnings per share would increase 1.6 cents per share, from $0.253 to $0.269.
However, if the Series A Preferred Stock were retired, it could save $44 million per year and increase net income to common holders by 2.2 cents per share. More value is dropped to the bottom-line using cash to redeem the Series A Preferred than repurchasing common stock.
Perpetual preferred stock no longer counts as Tier 1 capital, according the Federal Reserves new Capital Plans final rule. Therefore, it may make more prudent financial sense to redeem the preferred stock rather than repurchase common shares. Time will tell what the Board does.
It is not expected that the Series A Preferred Stock will be redeemed. But if it were then the potential total return would be over 50%. In the meantime it pays over 6.0%, or more than double the yield available on 30-year US Treasuries.
If an investor wants exposure to Morgan Stanley then the Series A Preferred Stock may offer the more attractive risk-reward return profile. Be sure to review the Series A Preferred prospectus for its details. While I currently do not own any Morgan Stanley issues, I am seriously considering the Series A Preferred Stock.
Source data: 10-Q
Additional disclosure: I do not plan on buying Morgan Stanley common stock, but may take a position in the preferred.