Get A 12% Yield On Alcatel-Lucent's Preferred

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It seems Alcatel Lucent (ALU) has been seeing a nice recovery as it has become profitable again. The company was under pressure before due to losses. However, after regaining profitability, the company is doing much better.

Alcatel-Lucent is estimated to earn 17 cents per share this year. While I like the fact the company is turning around, its hard to value the stock. Turnaround companies tend to be harder to value as their earnings tend to be more volatile. Its good to see recovery in earnings, but earnings could fall from this point. This would cause the stock to fall.

While it may be hard to know what Alcatel will actually earn this year, I still see the company earning a profit and there is one great way to play this recovery.

Lucent issued preferred shares in 2003 before the merger with Alcatel. The symbol for the preferred is LUTHP. The preferred shares pay a 7.75% dividend at a par value of $1000. However, since Alcatel was in trouble for the last couple of years, it cut its dividend in February 2009. Then when the company began to see profitability it reinstated it in May 2010.

The preferreds are trading well below par as investors fear there is still plenty of uncertainty for the company. While earnings may fluctuate, I still expect the company to be profitable.

The preferreds are trading at $650. This is a 35% discount to par value. In addition, since the cost basis is low, the yield is actually 12%. Also, since the company is profitable, I don't expect them to cut the dividend again. I also expect the preferreds to slowly begin to trade towards the par value of a $1000. This is a 54% return just on the price appreciation. Then if we factor in the 12% dividend, we begin to see a income play as well.

Companies that are profitable tend to have preferreds trade around par value because investors are confident they will be able to honor their obligations. Alcatel-Lucent is profitable, but the preferred is acting as if the company is in distress. I recommend income investors and even value investors to take a position in the preferreds as it will be worthwhile in the long-run.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I may initiate a position in LUTHP in the next 72 hours.