Both of these stocks have a relatively narrow trading range, and both have a very consistent dividend yield over the last few years. Both have a call price of $25, so at any point, these securities can be called at $25 (which is a bit higher than they are at right now). I would think that these would be snapped pretty quickly because of the yield and because preferred stocks are pretty high on the ladder when it comes to bankruptcy proceedings. It appears that because of the call price, there is little potential on the upside for the stock price--so in a sense, they are more like a bond than a stock.
Could someone enlighten me while these might not be a particularly good investment? Yes, there's some risk, but the yield is astonishing in this day and age.
UPDATE: Just got off the phone with the fixed income desk at Schwab. As the trader I spoke to explained, the rating companies are "more reactive than proactive" and the yield is probably a better indicator of the risk involved than the S&P rating. However: part of why the yields are as high as they are on these callable preferred stocks is the same reason that Fannie Mae and other GSEs are high yield relative to non-callable bonds of similar duration: you can be quite sure that the issuer will call these preferred stocks, and perhaps on very short durations. If you think of these as a way to make short-term investments with decent yields in exchange for some risk, that makes sense.
UPDATE 2: I ended up buying some of the Barclays Bank preferred stock (8.51% current dividend yield, symbol BCS+D), Atlantic Power Corporation (symbol AT) which has a 7.78% dividend yield--and the dividend is paid monthly), and Teekay Offshore Partners LP (symbol TOO) which has a 7.70% dividend yield. The attraction of all three companies is that they have a history of stable and high dividend amounts, and both AT and TOO are in fields that are likely to be continuing growth. (TOO provides transportation services for offshore drilling equipment.) Barclays is high yield at least partly because of the risk that Europe's financial crisis may deepen, but to be honest, I cannot afford to wait forever for adult supervision in Washington to cause a recovery of the economy, and unless I can improve my portfolio, I will be working at my day job until I am even older and grayer than I am.
UPDATE: Just got off the phone with the fixed income desk at Schwab. As the trader I spoke to explained, the rating companies are "more reactive than proactive" and the yield is probably a better indicator of the risk involved than the S&P rating. However: part of why the yields are as high as they are on these callable preferred stocks is the same reason that Fannie Mae and other GSEs are high yield relative to non-callable bonds of similar duration: you can be quite sure that the issuer will call these preferred stocks, and perhaps on very short durations. If you think of these as a way to make short-term investments with decent yields in exchange for some risk, that makes sense.
UPDATE 2: I ended up buying some of the Barclays Bank preferred stock (8.51% current dividend yield, symbol BCS+D), Atlantic Power Corporation (symbol AT) which has a 7.78% dividend yield--and the dividend is paid monthly), and Teekay Offshore Partners LP (symbol TOO) which has a 7.70% dividend yield. The attraction of all three companies is that they have a history of stable and high dividend amounts, and both AT and TOO are in fields that are likely to be continuing growth. (TOO provides transportation services for offshore drilling equipment.) Barclays is high yield at least partly because of the risk that Europe's financial crisis may deepen, but to be honest, I cannot afford to wait forever for adult supervision in Washington to cause a recovery of the economy, and unless I can improve my portfolio, I will be working at my day job until I am even older and grayer than I am.
...and here I thought you were speaking of 'firearm furniture'.
ReplyDeleteOh, well.
Firearms furniture does not have a yield, except in an esthetic sense. And that won't help me to quit my day job.
ReplyDeleteLast I checked Barclays was pretty highly leveraged on European debt, right now at 28.9. Like most European banks it's more highly leveraged than American banks and thus more susceptible to "runs." With what's going on in Europe this isn't very comforting. Considering that the outstanding obligations of Barclays is larger than the GDP of the UK you can see that there's no way the UK could backstop a failure on Barclays, so bankruptcy would be problematic. Not that that would stop Bernanke from backstopping as TBTF, though.
ReplyDeleteCompare Barclays to one of the more troubled US banks like BoA, which is only leveraged at 11.0. In general the World Bank doesn't like banks to have leverage past 20, so Barclays definitely is more aggressive and risky than a typical banking stock.
PhaseMargin: I wish that I had read that before I bought the Barclays stock! I might have been a bit less willing. Oh well, I knew from the yield that this was going to involve some risk.
ReplyDeleteYeah, you're learning that ratings agencies are trailing indicators. When you consider that ratings companies make their money by direct payment from those entities that they rate you can see why they're less than reliable for those purchasing securities -- they've got a built-in conflict of interest. Most of the crap real estate stuff was AAA rated until the crash actually happened, for example, despite everyone knowing they were junk well before that.
ReplyDeleteRatings' trailing nature should worry you now that the rumors of another well-deserved downgrade of US debt is coming, as well as imminent downgrades for various French banks. We've already seen Dexia restructure and get bailed out by France and Belgium because their exposure was almost exclusively European governmental bonds. The state of Europe froze Dexia's access to credit markets and their lack of retail banking deposits caused a liquidity trap. The same is starting to take hold in other French banks as US money markets avoid the risks of lending to European banks.
Sometimes I hate studying history. Honestly, the parallels between now and 1932 are terrifying. Big stock market crash (at least partially caused by speculative real-estate bubbles in places like Florida where second mortgages [almost unheard of before then] and "long term" 20 year mortgages fueled the bubble), followed three years later by a nearly full market recovery until various European banks started to fail and creating a cascade of economic chaos until we saw a 90% drop in the market, massive unemployment, and general misery. And the situation now is made worse by CDS "insurance" swaps across the globe that just about guarantee a cascade of bank failures once one goes down,
We live in interesting and precarious financial times. You may be very happy to have a relatively protected job working for the state in a critical department very soon despite the poor pay. I'm trying to be optimistic, but with today's political class that's very difficult. Progressives like Hoover and FDR caused more problems than they solved and I see a Progressive faction still in government trying to repeat those same mistakes.
Firearms furniture does not have a yield, except in an esthetic sense. And that won't help me to quit my day job.
ReplyDeleteWell, it could, but you'd end up having to take on a much more dangerous night job.
As I understand it these ADRs on UK banks are Fixed yield, when issued you buy'em for $25 and get the posted % of $25 quaterly. They are based on preference shares which are indeed up the pecking order. I think if Barclay's were to go we'd be doooomed all in all. Can I draw your attention to RBS ADR series L yeild on $25 dollars of 7.65 currently trading around $20 therefore yeild on that is 9.5%ish. 84% owned by UK gov so chances of going under pretty slim (UK still very highly rated despite all (haven't defaulted once in 400 years)). Also if you lot buy them mine will go up (I got them at $8.74 but that was 2009 when the ordinary shares had dropped to 15c).
ReplyDeleteI agree that Barclays is "too big to fail" and anything that took them down would probably mean that my ammunition and canned food supply would be more meaningful. The RBS ADR series L is currently trading at $15.41, and is S&P rated BB. I realize that S&P's ratings are often reactive, rather than proactive, so the situation may even be more dire than it appears. I doubt that I would be buying enough to significantly move the market. :-)
ReplyDelete