Added 8/29: My thoughts on the EC burden sharing policy, and how to stop it, have been evolving since this post. Some of my subsequent observations may be of interest to owners of the Aegon and ING hybrids:
*************original post
I did not want to divulge all the reasons given by RB yesterday for buying a TP with a maturity of 2048, issued by a bank held in some disdain by the LB. RB mentioned that the reason had something to do with paring a bond lottery ticket with a stock lottery ticket. I was too embarrassed to add its remaining remarks, something like pairs are good, man and woman, ying and yang, cheese and hamburger at the Five Guys restaurant along with the fries of course, and so on. It made no sense whatsoever to the LB.
1. Heinz (owned): Heinz was one of the consumer staple stocks added by the RB during its March frolic in violation of all of LB's trading rules. The primary reason for buying it was the price, $31.67, the dividend yield at that price, and the perceived safety of that dividend. Buy of HNZ at 31.67 In May HNZ raised its dividend to 42 cents per share, a fact worth noting in the current environment of dividend cuts and eliminations. Heinz
Heinz reported better than expected earnings this morning, earning 67 cents per share on revenues of 2.47 billion. The stronger dollar hit both earnings and revenues, lowering the sales number by 9%. On a constant currency basis sales grew 4.5% (1.7% excluding acquisitions/divestitutes) and EPS would have increased 9.7%. Operating free cash flow was 121 million. It was important to me to see a 14% organic sales growth in emerging markets, which now generated 16% of HNZ's sales.
Heinz is another position added during the dark days that will most likely be kept as long as the company continues to raise the dividend. At the current rate, the yield is around 5.3% at my cost. Unlike Coca Cola, however, Heinz has a more checkered dividend history, and only increased the dividend slightly this year from $.415 to $.42.
2. Roth Conversion: I thought this was a good article on why a Roth conversion may make sense for certain individuals. money.cnn.com/2009/08/18/ Last year and into March of this year, I did several partial Roth conversions, focusing on securities that had fallen in price to transfer from my regular IRA to the ROTH IRA. Taxes of course had to be paid as a result of conversion, with the value of the securities at the time of conversion included as part of gross income. Since the values had fallen, particularly in October 2008, I paid less income tax on the conversion than I would have had to pay before the bear market or even now. In fact, several of the securities have more than doubled since the conversion, and some of those have since been sold. (e.g item #6: SOLD 1/2 OF PIS POSITION) That was the main reason for the conversion. Another reason is discussed in the article from Fortune magazine. It would be reasonable to expect tax rates to increase in the years to come, at least for those considered "well off" by the Democratic Party. And, the income limits will apparently be lifted for the conversion starting in 2010. Since I am 99% retired, I did not have to worry about the income limit issue, and focused just on the valuation issue creating opportunities to do partial conversions. I have done at least five altogether.
3. ING Debt (IGK/IND/INZ/ISF): I was gone this morning. When I returned before noon, I could see that I was getting smacked in a big way with the ING debt issues that I own. The only news that I could find was a Fitch downgrade. The downgrade was into junk status based on the possibility that government support will not extend to subordinated debt issues under a burden sharing concept. I understand that to mean that Fitch believes the European financial institutions that have received government assistance might be required to defer dividends so that the junior debt holders "share" the burden. Although I do not have access to the Fitch report, it looks like the ING hybrids were reduced to B+. I do not plan to take any action with my positions in response to Fitch's belief that a deferral is a possibility. I will wait until a deferral actually happens and then decide what to do. ING said in its last earnings release that it planned to sell assets to pay back the Dutch government. Today's action demonstrates clearly how the mere talk of a possibility of deferral will have a substantial adverse impact on the price. Another similar scare happened in February.ING Preferred Stocks/Professor Schiller/GM Bankruptcy/ An actual deferral would most likely slam the prices of these hybrids. I did not see Aegon included in the list from Fitch, but that firm has also received state assistance. The AEGON securities are down a lot, but not as much as the ING hybrids. Both the ING and Aegon hybrids that I own are currently scheduled to go ex dividend later this month. The ING common is not impacted, trading slightly up in early trading. I have referred to these hybrids in the past as bungee jumping, not for the faint of heart, and they are proving their volatility once again today. Bungee Jumping Aegon and ING Preferred Stocks/ BlackJack and Stock Investing: Lessons Learned & Applied ING Preferred Stocks: Links in one Post Possibly, I may add 50 of IGK at some point but I want to keep my exposure to these issues small due to their volatility. And, they are likely to remain volatile for as long as there is a rational concern about a deferral.
I will look tonight to see if there is anything else causing the fall today other than Fitch downgrade and their speculation, but I could not find anything else so far.
ADDED 12:08 I see that Moody's also downgraded ING's subordinated debt to junk status, moving the rating from A3 to Ba1. CNBC.com
Note: AEGON did recently raised 1 billion Euros in a stock sale to pay back part of its obligation to the Dutch government.
Added 12:52: Moody's sees a high probability that the European Commission will advise ING to defer dividends. ING is currently in talks with the European Commission about its restructuring plan.
Added 1:02: A reader pointed out that Fitch also downgraded the Aegon hybrids. Those securities went from an investment grade of BBB+ to BB.Fitch
The Aegon hybrids were also downgraded. But:
ReplyDelete"Fitch says it views positively Aegon's recent raising of £860m of equity, with which it intends to repay part of the Government support."
http://www.trustnet.com/News/DisplayStory.aspx?id=38536
Cathie: Aegon is not as deep as ING into borrowing money from the Dutch government, and has recently raised capital by selling commons shares with the intent of using the proceeds to pay back a good chunk of its debt to the Dutch government, as you pointed out in your comment. Both firms seemed to be making progress prior to today, and this alleged action by the European Commission to pressure the European financial firms to defer payments on their debt obligations seems more political than anything else to me. I would also call it irresponsible for these two firms.
ReplyDelete