4 High Yield Insurance Preferred Stocks For Consideration

Includes: AEG, AHL, COF, ING, PUK
by: Investment Underground

By Roger Choudhury

I like preferred stocks because I can smooth out the bumps and erratic moves of the market through consistent dividend payments. Also, these instruments do not ebb and flow drastically like common shares and equities. Sophisticated investors should keep in mind that companies aim to make the dividend payments to avoid credit rating downgrades.

Below, I focus on insurance companies because of consistent premiums from their clients. I take care to mention those at or below par value or call price, which is the dollar amount that you get after maturity is reached. Generally speaking, you should avoid instruments that trade significantly above par value, because you end up losing the gap between what you paid for and the par value or call price. With the Fed targeting 0%-0.25% for the federal funds rate and slowing global economic growth, you ought to consider the following:

AEGON (NYSE:AEG) (6.375% perpetual)

Earnings are due out February 17 on this pension and insurance behemoth and I think the numbers will look good for the full year. The current year estimate is for $0.43 cents. I think that with aging demographics in Europe and the U.S. and lots of job cuts and changes to pension plans, Aegon has racked up significant fees from pension plans and premiums from its insurance divisions. Going forward, I think the life and term insurance businesses will remain stable. The investment and asset management businesses will be lackluster given competition from larger players like Fidelity and Vanguard on the institutional side, however Aegon's sticky relationships will help it through the current environment. This all bodes well for the preferred shares, which could see some upward movement.

Recent Price $22.29 per share
Callable? Yes, at $25.00 per share, after June 14, 2015

Possible for 11.1% capital appreciation

Preferred Stock IPO May 2005
Dividends $ 0.3984375 per quarter

All payments made since inception

Next dividend payment should be on March 15

Record date is on March 1

Current yield 7.0%
S&P Rating BBB
52 week trading range $15.50 - 24.59
2009 lows ~$3 (from $26)
Ticker symbol (Yahoo! / Google / Fidelity) AEH

These are technically fixed-rate capital securities, which gives investors a combination of the features of corporate bonds and preferred stock. Unlike common and preferred stock dividends, these dividends are tax-deductible for the issuer.

In any case, these clarifications do not affect you much. Hone in on the dividend yield, and relative to the turbulent equity markets, there is a higher degree of capital safety. I recommend AEH to investors building their nest egg with a medium risk profile. Retirees should avoid this.

Aspen Insurance (NYSE:AHL) (5.625% Perpetual Preferred Income Equity Replacement Securities)

Aspen is a $2 billion insurer with a dividend yield of 2%. By comparison, the preferreds yield 5%. The company blasted past its latest estimates with little fanfare, earning a penny in its December 2011 quarter when a loss of $0.21 was expected. This company is quietly building out its U.S. insurance business, and the preferreds should benefit as cash flows increase. On an operating basis, the company saw approximately $340 million in cash flow on an operating basis over the last year. That number could double over the next five years on sales growth in Southern and Western U.S. markets. This bodes well for the preferreds.

Recent Price $55.00 per share
Callable? No, but par value is $50 per share
Preferred Stock IPO Dec 2005
Dividends $ 0.703125 per quarter

All payments made since inception

Next dividend payment should be on April 2

Record date is on March 15

Current yield 5.0%
S&P Rating BBB-
52 week trading range $48.00 - 57.35
2008 lows ~$24 (from $57)
Ticker symbol (Yahoo! / Google / Fidelity) AHL-P / AHL- / AHL/P

You may call this a traditional convertible preferred stock, but it has another technical term, as you can see above. These securities are not callable, but it does have a par value of $50 in the case of liquidation. The shares are senior to ordinary shares, and it pays out dividends monthly, just like generic preferred stocks.

This is nearing its 52 week high, so be wary. A decent entry point would be $52.50, and shares were last trading there in mid-December. I believe that those that are more aggressive should consider this for their dividend portion of the portfolio. Additionally, do not expect much appreciation.

ING Group (NYSE:ING) (7.05% Perpetual Debt Securities)

ING sold off its U.S. online banking division on Capital One (NYSE:COF) for $9 billion last year at, what I think, was potentially the height of the business. This was a great move for preferred shareholders going forward. I do not think that the preferreds fully recognize this event, and investors could use this as an arbitrage play in the short run. However, I like ING preferreds over the long run, too. The company is innovative, and its U.S. online bank is a case in point. It co-pioneered wide use of e-checks and high yield money market accounts as well as novel advertising, showing the "multiple" by which its account yields beat competitor accounts. In banking, innovation is rare. ING's management can execute, in my opinion.

Recent Price $22.74 per share
Callable? Yes, at $25.00 per share, since Sept 2007

Possible for 8.6% capital appreciation

Preferred Stock IPO July 2002
Dividends $ 0.440625 per quarter

All payments made since inception

Next dividend payment should be on March 15

Record date is on March 1

Current yield 7.6%
S&P Rating BBB-
52 week trading range $16.48 - 24.48
2009 lows ~$3 (from $25)
Ticker symbol (Yahoo! / Google / Fidelity) IND

IND is an exchange-traded debt security. Exchange-traded debt securities include the debentures, notes and bonds that are traded on the stock exchanges instead of the bond markets where most bonds are traded. These debt securities resemble preferred securities in their basic features. Unlike most of these, IND does qualify for the 15% tax rate.

ING Group is a well-known company, and so I would recommend this to those nearing retirement, looking for a higher yielding income instrument. Yet, be aware that this collapsed to single digits in share price in the midst of the financial crisis in 2009.

Prudential plc (NYSE:PUK) (6.50% Perpetual Subordinated Capital Securities)

Cash flow is king for Prudential, and the company is doing a good job of filling its coffers with insurance premiums. The latest full fiscal year brought in $4.5 billion in cash flows on an operating basis. Demographic trends should continue to boost sales for the company, particularly in its life insurance division. Real estate is likely to see a rebound in Prudential's North American markets, which will positively impact this latest full fiscal year's results. However, investors should note that the company sold off its real estate division to Brookfield Property in December. This was a wise move in my opinion, and allows the company refocus on its core insurance divisions. More capital, of course, helps provide more liquidity backing the preferreds.

Recent Price $25.79 per share
Callable? Yes, at $25 per share, since Sept 2010
Preferred Stock IPO July 2005
Dividends $ 0.40625 per quarter

All payments made since inception

Next dividend payment should be on March 23

Record date is on March 15

Current yield 6.2%
S&P Rating A-
52 week trading range $18.76 - 25.90
2008 lows ~$5 (from $21)
Ticker symbol (Yahoo! / Google / Fidelity) PUK-PA / PUK-A / PUK/PA

It seems amazing that Prudential paid out dividends during the 2008 crisis, but it is not when you consider that it is an insurance company receiving consistent premiums. Pitching this, the preferred stock brokers were semi-geniuses in 2008, 2009, and 2010. Because of the A- rating, I believe that retirees should take a serious look at this, if they want to pick up a security to replace maturing bonds. Consider purchasing shares on a pullback.

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