Tuesday, October 14, 2008

DUKE ENERGY (DUK) & Redux on Floating Rate Preferred Issues

I just bought a small position in Duke Energy (DUK) at 15.79, an electric utility that is currently yielding around 5.8% at that price.  For this kind of investment, I will reinvest the dividends and hold for some time.  I do not expect much appreciation, maybe to 19 or so in a year or two.  I am just trying to bunt for a single on this one.  I have a fair amount of research reports on this electric utility which I reviewed prior to purchase, including  lukewarm S & P and Morningstar reports, and  slightly more enthusiastic reports from Value Line and Barclay's.

The three month LIBOR rate is still being stubborn, only falling slightly from its recent high around 4.8%.  I thought the measures taken by the world governments would have already brought it down substantially.  The floating rate preferred issues were attractive when I discussed them earlier because the guarantee provided a decent yield at the then current costs.  Some of them have bounced off their all time lows.  The float provisions of these securities,  which are tied to a percentage above LIBOR varying in the amount among the various issues, does provide a measure of protection to the buyer when short rates rise, whatever the cause may be-inflation or worldwide credit concerns.  I would still view the MET LIFE  floater        ( METPRA) as the best one at the greater of 4% or 1% over 3 month LIBOR since I have more confidence in the credit, with the Aegon (AEB) floater being my second  and more risky choice at the greater of 4% or .875% above 3 month LIBOR.   During the meltdown last week, I had a limit order on the METPRA filled at 7, which I just viewed as a ridiculously low price and the Aegon floater went down to below 3-up  to 8.5 today, a 36% gain so far today.  I am moving on to other securities now.  At the price of 3,  the guarantee on AEB was worth 33% a year, more when the LIBOR float would kick in, an amazing price which had to assume as its basis the imminent failure of this large Dutch insurance company.  And why would someone make that assumption?   Here are some links about what the Dutch government has been up to recently and to AEGON in particular:Reuters

 In these blogs, I am acting as an unpaid financial journalist and an occasional ornery political commentator. In full disclosure, I own shares of DUK, AEB and METPRA and will continue to buy additional shares of DUK at or below the current price 15.8, or even slightly above.  AEB and METPRA are discussed extensively in several prior blogs.   This is not a recommendation to buy or to sell.  Trade at your own risk, and perform research about Duke Energy by reading research reports and further studying the financial health, earnings releases and news, earnings projections  & other pertinent information on Duke Energy (symbol DUK at yahoo finance) before making any investment. Consult with your financial advisor prior to making any purchase. In this blog, I am merely describing my reasons for purchasing this security and the potential pitfalls that I identified prior to purchase.  This security may not be suitable for others based on their unique financial position and risk profile.  

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