Friday, April 24, 2009

Averaged Down on POM/Added To METPRA/

After Pepco announced today its regular quarterly dividend, I averaged down by buying just 30 shares of this electric utility at $11.63.   The yield at that price is over 9% which suggests a reasonable possibility of a dividend cut down the road.  Barclay's states in its 3/30/09 report that management reiterated its commitment to the dividend at a recent conference.  The primary problem at Pepco has to do with its unregulated Conectiv business, with the problems discussed in both the S & P and Barclay's reports on POM so there is no need to summarize them here.  Since these problems appear to be ongoing, it made even a 30 share purchase marginal at best. I am reinvesting the dividends paid by POM into additional shares.   This is an old geezer kind of purchase which may look good down the road provided the issues in the Conectiv business improve and the dividend is maintained.  The recession is also having an adverse impact, not only on electricity sales in POM's regulated business but also in collecting revenues from residential customers.  But about 20% of Pepco's business is with the government. 

Somewhere in the thousands of pages contained in this blog, I may have said something like I would not be buying any more shares in a non-cumulative floating rate equity preferred issue which does sound rational.  Notwithstanding that admonition to myself, I added 50 shares of METPRA at $12.5 on Friday.  In my defense, I would say that I do not change my mind as often as Cramer.  METPRA is a non-cumulative (never good) floating rate preferred that pays the greater of 4% or 1% above 3 month Libor. That is an excellent float provision.  Par value is $25 with no maturity date (always bad). Based on the guarantee and a $12.5 cost,  the yield doubles to 8% from 4% since dividends are calculated based on the constant number of par value, not an investor's cost or the market price.  The Libor float calculation also doubles.  So if 3 month Libor during the relevant computation period is 5%, then the yield at par would be 6% or 12% with a cost basis at 1/2 of par value. 

I have discussed this one several times in the past, and it would have been better in retrospect just to buy more shares at $7.  Back at that time, however, I had less confidence in Met Life continuing to pay the dividend.   Given the increase in my positive outlook, I may also eventually transition the 100 shares in the regular IRA to a taxable account due to the qualified dividend status of equity preferred dividends.  The dividends paid to me for owning METPRA in 2008 were treated as qualified in my 2008 1099, which is consistent with my understanding that equity preferred issues are treated as equity for such purposes, whereas payments for debt or Trust Preferred shares are classified as interest.  It would just make more sense to take advantage of the qualified dividend status by holding all shares in the taxable account.  My only reason for having 100 in a retirement account is that I had money to invest on the day it was purchased, and the price was good.   I currently own 250 shares of METPRA with 100 held in a retirement account.  
This is a link to the METPRA prospectus:METLIFE INC
The main protection for payment of the preferred dividend is the payment of a cash dividend to the common stockholders: see p. S-64 of the prospectus.
To sum up my opinion on METPRA, the disadvantages are the lack of a maturity date, the non-cumulative nature of the dividend, and the junior status of the security.  The advantages are the excellent guarantee and float provision for these type of securities, the large discount to par value which juices the dividend yield, the lack of a maximum cap to the dividend payable which cap is present in the synthetic floaters, and the status of the dividend as a qualified dividend under the current U.S. tax code which is a relevant consideration for taxpayers in a high tax bracket.  

The bottom line on METPRA for me is the tax advantaged nature of the dividend compared to interest with a guarantee of 8% at my last purchase with some inflation protection protection due to the float provision and more confidence in it being paid without interruption.  I will just try to ignore my unwillingness to buy more at $7.  It would still be my opinion, putting credit risk issues aside, that AEB is a better value at its current price of $6.9, a $25 par value, with a 4% guarantee and a float of 7/8% above 3 month LIBOR and that security has  cumulative features to the dividend (see pages S-3 to S-5 of the prospectus:  http://www.sec.gov/Archives/edgar/data/769218/000104746905027219/a2165248z424b5.htm I own all that I want of that Aegon equity preferred floater, at least for now, with 350 shares.   However,  Met Life is still paying a common stock dividend, the main security blanket for the equity preferred shareholder and Aegon eliminated its common dividend last year so that always creates an enhanced risk for the preferred shareholder.   

DISCLAIMER:

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. I have never worked for a financial institution and never will.  In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  By way of example, it is unlikely that I will ever need the funds contained in my retirement accounts. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  It is always important to follow the investment process. the investment process/links to further information on canadian energy or royalty trustsInvestment Process Part II: Bonds and Bond Like Investments   NOT A RESEARCH SERVICE/Add of PWE Last Week   These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me.




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