Readers of my column know that I am very high on preferred stock. Once thought of as an exotic security, preferred stock has become a go-to for income investors in an era where bond yields fell to near-zero.
The beauty of preferred stock is that it is a substantially higher-yield security than bonds, and that will likely remain the case for some time to come. The other great thing about preferred stock is that while it is theoretically riskier than bonds, the true risk is roughly equal to bonds.
With bonds, the idea is that a solvent company or municipality gets a loan from investors. The yield reflects the risk involved. With preferred stock, if the company itself is solvent, then the preferred stock is going to be solid.
Should a company end up in trouble, the likelihood is that preferred stock holders will be wiped out … but bondholders won’t fare much better.
Here are three new preferred stock issuances on companies that I consider very solvent.
New High-Yield Preferred Stock Issuances: Sunstone Hotel Investors Inc (SHO)
Dividend Yield: 6.45%
On May 10, Sunstone Hotel Investors Inc (SHO) issued a Series F 6.45% cumulative preferred stock at $25 par value.
Sunstone is riding the wave of solid growth in the hotel industry right now, where acquisitions have been heating up the sector along with robust revenue per available room growth. Things aren’t quite as robust at SHO compared to some of its peers, but the company is on solid footing.
The proceeds from the preferred stock were used, along with another issuance in March, to pay off its Series D 8% preferred. Thus, despite a comparatively weak quarter, the market still handed SHO a reduced cost of capital.
The market has already bid the Series F shares up to $25.75 or about 3% over par, indicating the market’s faith in Sunstone’s cash flow and solvency.
New High-Yield Preferred Stock Issuances: Bank of America Corp (BAC)
Dividend Yield: 6%
Bank of America Corp (BAC) has a long history of issuing preferred stock. It put out a $900 million offering of a 6% non-cumulative preferred, Series EE on April 18.
There have been lingering concerns about Bank of America ever since the financial crisis, as the bank seems unable to persuade the Federal Deposit Insurance Corporation and regulators totally that it really is on solid ground.
I think it is, and the market seems to agree. It funded this massive 6% offering and it has bid it up to $25.61. Also, note that this is a non-cumulative issue.
Normally, preferred stocks that offer high yields do so with a “cumulative” clause. That means that if the dividend is suspended for any reason, it continues to accrue. If the dividend is then re-instated, the company must pay the accumulated dividends.
Apparently, B of A curries more favor with investors than regulators, allowing the non-cumulative issue to be carried forth.
New High-Yield Preferred Stock Issuances: Goldman Sachs Group Inc (GS)
Dividend Yield: 6.3%
Goldman Sachs Group Inc (GS) is a name that still engenders a lot of anger among Americans, yet there’s no denying it remains a premier — and solvent — investment bank.
Goldman has also issued numerous preferred stock securities in its time. It already had seven different preferred securities of one type or another out. It also issued a 6.3% non-cumulative preferred (series N) in February.
For those keeping track, that generated $675 million for Goldman. Clearly, investors don’t give a hoot about reputation, because they have bid the stock up to $26.51, a full 6% over par.
That’s actually a rather pricey issue at this point, but if there’s a vote of confidence one needs regarding a company’s solvency, this is it.
Not only are there higher-yielding issues out there, but they are cumulative. In case you’re wondering, this is also Goldman’s highest-yielding issue so far, save a 6.375% issue that is trading even higher.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
