by Lawrence Meyers | September 20, 2013 12:39 pm
I had some idle cash sitting around, and I decided I wanted to deploy it into an investment that would be relatively stable yet throw off a nice dividend.
These days, though, that eliminates just about everything … except preferred stocks.
Preferred stocks are an often overlooked asset, but these “bond-stock” hybrids are beloved by those in the know because of their high yields and relative stability.
While many investors can easily access these through exchange-traded funds and mutual funds, I also prefer to dabble in a few individual preferred stocks:
First, let’s look at the Bank of America Depositary Shares, Each Representing a 1/1,000th Interest in a Share of 6.625% Non-Cumulative Preferred Stock, Series I.
Yes, that is the security’s official name.
It means that one share of this “depository share,” issued at $25, is equal to 1/1000th a share of the actual preferred stock, which costs $25,000 each. Don’t get confused, though. It’s really just a share of stock that happens to represent a fraction of a larger share of stock.
This particular security is non-cumulative, however. That means that if Bank of America (BAC), for whatever reason, decides it can’t or won’t pay a dividend on this series of preferred stock, then you won’t accrue those unpaid dividends as often is the case with other preferred series. It is also callable in October 2017, meaning the company can buy back the shares after that date. The security trades at $25.62, so the effective yield is 6.46%.
I’ve watched Bank of America for some time, hold the common, and think it’s on very solid ground. Investors may be interested to know that BofA offers many different types of preferred stock, as well — some of which are carryovers from other firms that BofA purchased, such as Merrill Lynch.
If you went to college, you might have been subjected (as I was) to a highly fragmented off-campus residence market. Times are changing, though, and someone finally got the idea to establish a housing brand that served college communities.
If retirement homes and hotels can have brands, why not student housing?
Campus Crest Communities (CCG) operates 33 student housing properties comprising 6,324 apartment units under its “Grove” brand name. It’s a REIT, so it distributes a minimum of 90% of taxable income as a common dividend of roughly 6%, which may even attract other investors. Campus Crest carries $225 million in debt and services it at a rate of about 5%. The company came into its own in 2012, as it reported solid EBITDA of $16.5 million and a profit after debt service and preferred stock payments, which it just started that year.
Its 8% Preferred Series A shares were issued at $25, and are now trading above par at $26.19. That tells us that investors have a lot of confidence in the company and its ability to make the preferred stock payments. By trading above par, the effective yield is 7.61%.
I also jumped on the 9% Preferred Series E of an interesting REIT called EPR Properties (EPR), a $2.38 billion trust that owns 114 megaplex movie theaters; nine entertainment retail centers; seven family entertainment centers where one can bowl, enjoy nightlife, or sit atop observational towers; 13 metro ski parks; three water parks; four golf complexes, and 48 public charter schools.
So I guess the kids can break out of a school owned by EPR, then enjoy all the entertainment the company offers.
This is a very interesting entertainment infrastructure play, in that the company doesn’t operate any of these locations. It leases them out, so it removes a degree of risk from being directly dependent on the revenue generated at each location. As long as EPR leases to credit-worthy tenants, it will be relatively insulated.
EPR sits on almost $1.5 billion in debt, but it’s only costing them about 5% in interest. The company turns a very handsome bottom-line profit of $93 million after preferred dividend payments. Once again, we have a preferred stock that investors are confident in, as it trades well above its $25 par, at almost $29.
I’m usually not comfortable paying this far above par for an issuance, but I’m in it for the dividend, which effectively yields 7.77%.
As of this writing, Lawrence Meyers was long all the aforementioned preferred securities mentioned, as well as BAC common shares. did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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