Preferred Stocks: Boring...But Safe

I first learned of preferred stocks in Accounting 101 in college. If memory serves me correctly, I got a "Gentlemen's C" in the course. Close to some 30 plus years later, the term "preferred stocks" reentered my vocabulary.

For numerous reasons, the primarily one being my age, about a year or so ago I began to allocate my portfolio more toward a yield bias. I investigated the "usual suspects" - government and corporate bond funds, CDs, high yielding common stocks and .... dare I say ... even REITs?

When reading the business section of the New York Times one Sunday, I noticed a section on Preferred Stocks and decided to do some research. I looked at the BIG names (remember ... they were big at the time!) like Merrill Lynch (MER), Royal Bank of Scotland (RBS) and ABN Amro (ABNYY.PK). As a sidebar, I of course did not know that ABN Amro would be acquired in part by RBS ... but hey, nobody's perfect. Ergo, I have a little more exposure to ABN/RBS then I am currently comfortable with.

The yields were HIGHLY attractive, the names were (past tense) pristine and the "call" or maturity dates were only a few years out. In the interest of full disclosure, I purchased, and hold to this date, MER-PL,ABN-PE and RBS-PL. Be advised that both Merrill and RBS have numerous issues of preferreds for potential analysis and possible purchase.

Fast foreward two years later. Hello, Robert! You have to date received all your dividends at the attractive yields you anticipated. Hello, Robert ... the value of your holdings have depreciated quite a bit.

To the point. I am most satisfied with the yields I am receiving. I would be much MORE satisfied if I purchased these securities last week as I firmly believe the market has priced in doom and gloom, death and destruction, the Four Horsemen of the Apocolypse and perhaps even the Second Coming.

Yields at current prices: MER-PD 9.91% (call date past), ABN-PE 8.97% (call date past) and RBS-PL 9.30% (call date 09/30/09).

So ... for older "baby boomers" such as myself who remember the Monday Night Football segment sponsored by IBM entitled "You Make The Call," this is your chance.

Sometimes markets are irrational. Sometimes banks and brokerages do cease to exist. It is my belief that this time markets are irrational and that the institutions mentioned will be around for some time .. at least until I become a grandfather. But that call is in the hands of my children!

Good luck to all and God bless both America and our planet.

Disclosure: Author holds positions in MER-PL,ABN-PE and RBS-PL

 

Comments

[loubringe]

Ridiculous-on the average many, many preferreds are off 20-30% just in last 2 months alone-With Fed looking to raise rates and many banks and brokers falling, falling-these are quite risky!

[PARK DEE]

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[CARMEL]

I GREATLY APPRECIATE THIS COMMENTARY AS ANOTHER UNHAPPY SHAREHOLDER OF RBS PREFERREDS.
SAD TO SAY THERE IS LITTLE INFO AVAILABLE.
DOES ANYONE HAVE DATA ON THE "COVERAGE" OF THE
PREFERREDS, MOST OF WHICH ARE NOT CUMULATIVE.

DOES ANYONE KNOW HOW VULNERABLE THE 'PARENT' BANK IS FOR MORE WRITEOFFS?

APPRECIATE ANY LEADS

[RobertNilsen]

Hello Carmel. Nice to read your post.
I am most unhappy also with the current price level .. as stated in my original post .. but not unhappy with the yield at my purchase price.
Ergo .. the ultimate question is the safety of dividend payments and I am just as much "in the dark" as you appear to be.
We both know that disclosure issues are different in the gool ol' USA v the rest of the world. A fact of life.
"At the end of the day" will we continue to receive our dividends? Will the bank survive? Can we accept the yields we were given? When, if ever, do we have to sell? And (I am so embarrassed to admit that I do not know if the series I own is cumulative or not) can the bank afford (from a PR standpoint) to omit preferred dividends?
I wish you and I the best. I am nervous .. confused .. but lived through 1987, etc.
God Speed.

[CFA Guy]

Call date and maturity date are not the same thing!!! RBS has the right, not the obligation to redeem your shares at par on the call date. The RBS-L have a coupon of 5.75% and are non-cumulative perpetual. RBS's cost of capital is well in excess of 5.75% which makes it very unlikely for RBS to call this issue in your lifetime. I am not claiming that they are a bad buy at $12.50 but think you should understand the mechanics of these securities before posting your opinion.

[Fugi Joe]

I agree that these several of these issues are not priced in line with reality. It appears that the shorts are also active in this market. Merrill, in particular, has plenty of assets to unload to make payments. If they ever want to access the debt and preferred markets again, they probably will make sure to make the payments. This company cannot afford a junk rating. Yields are now around 12%. Buying into earnings is a decent speculation that takes some courage. The uncertainty is causing a temporary opportunity. They are likely to placate everyone in regard to insolvency. The huge brokers and bank will not be allowed to fail; that is not how this country works.