Consider These 4 High Yield Utility Preferred Stocks

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Includes: EIX, EXC, PCG, SRE
by: Investment Underground

By Roger Choudhury

Below, I focus on preferred stocks from utilities because of stable cash flows from customers. I also ran a stock screen, and noticed that higher yielding preferreds come from California. I take care to mention those at or below par value or call price, which is the dollar amount that you get after the security reaches maturity. Generally speaking, you should avoid preferred stocks 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:

Pacific Gas & Electric (NYSE:PCG) (5% Redeemable Series A)

Recent Price

$25.33 per share

Callable?

Anytime at $25.00 per share

Dividends

$0.3125 per quarter

All payments made since Q2 2004

Next dividend payment is on May 15

Record date is on Apr 30

Current yield

4.9%

S&P Rating

BB+

52 week trading range

$20.90 - 26.00

2008 lows

~$20 (from $24)

Ticker symbol (Yahoo! / Google / Fidelity)

PCG-PE / PCG-E / PCG/PE

In the first nine months of 2011, EBIT is down 16.2% to $1.12 billion. Moreover, interest expense rose by 3.3% to $527 million. Thus, the company has lower coverage of its preferred dividends, but keep in mind that net income is still positive at $771 million (pdf), and the debt to equity ratio has declined to 0.97 from 1.14 in 2007. Also, noting the stability in share prices throughout the 2008-09 financial crisis, I would still recommend this to income investors who are looking for an investment and have a medium risk profile.

Southern California Edison (NYSE:EIX) (4.24% Cumulative)

Recent Price

$22.30 per share

Callable?

Anytime at $25.00 per share

Possible to make 11.1% in capital appreciation

Dividends

$0.265 per quarter

All payments made since Q1 2002

Next dividend payment is on May 31

Record date should be in the first week of May

Current yield

4.7%

S&P Rating

BBB-

52 week trading range

$17.76 - 22.74

2008 lows

~$15 (from $22)

Ticker symbol (Yahoo! / Google / Fidelity)

SCE-PC / SCE-C / SCE/PC

Technically, the next dividend payment is on February 28, but we missed out on that already.

EBIT declined 12.2% in the first nine months of 2011 to $1.2 billion, and interest expense rose by 16.0% to $601 million. The decrease in year-to-date earnings was due to lower realized energy prices, merchant coal plant generation and trading income, as well as higher interest expense related to renewable projects. However, the company raked in $845 million in profits, which, by and large, covers the preferred dividends. I suggest this for income investors who desire exposure to the utilities sector.

PECO Energy (NYSE:EXC) ($4.40 Cumulative Series C)

Recent Price

$96.00 per share

Callable?

Anytime at $112.50 per share

Possible to make 16.8% in capital appreciation

Dividends

$1.10 per quarter

All payments made since Q1 2002

Next dividend payment is on May 1

Record date is in the final week of June

Current yield

4.5%

S&P Rating

BB+

52 week trading range

$79.71 - 96.00

2008 lows

~$69 (from $87)

Ticker symbol (Yahoo! / Google / Fidelity)

PE-PC / PE-C / PE/PC

In the first nine months of 2011, EBIT fell by 12.2% to $2.923 billion. Profits are mainly down due to increasing operating costs. However, interest expense decreased by 14.4% to $526 million. I also believe that the company has enough cash flows to cover preferred dividends payment for many years to come. I recommend this security to more aggressive investors who are seeking an income-oriented instrument. Retirees should avoid this until the merger with Constellation Energy comes through.

San Diego Gas and Electric (NYSE:SRE) (4.40% Series)

Recent Price

$20.57 per share

Callable?

Anytime at $21 per share

Dividends

$0.22 per quarter

All payments made since Q1 2002

Next dividend payment should be on Apr 15

Record date is in the third week of Mar

Current yield

4.2%

S&P Rating

BBB+

52 week trading range

$15.70 - 20.99

2008 lows

~$14 (from $18)

Ticker symbol (Yahoo! / Google / Fidelity)

SDO-PC / SDO-C / SDO/PC

EBIT surged by 177.0% to $1.316 billion in the first nine months of 2011, but interest expense rose to $344 million. Also, the debt to equity ratio rose to 1.04. These last two items are disconcerting, but, for the preferred stock, S&P gave its seal of approval with a BBB+ rating. I advise this for more risk averse retirees, but you must be aware of how much risk you can handle. Purchase this on a pull back because SDO-PC is nearing 52 week highs.

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