Tuesday, October 13, 2009


I am busy on other matters today.

1. CIT (own just 1 $1000 bond maturing in December 2009): Reuters reported last night that the tender made by CIT to bondholders was "seeing little interest". Without a successful debt exchange, a bankruptcy filing becomes more likely. It may be too early to bury the possibility of a successful tender, in spite of this leaked story from "sources". The CEO did just submit his resignation, which does not favor the non-bankruptcy end game.

2. Ford Motor (own Ford Motor Credit bond only, FCZ): Ford's common shares rose over 7% yesterday to $7.62 based on its news release that strong sales in Europe drove its market share to 10.1%, with Ford Europe selling 152,600 vehicles in September. Ford That number represented a 12.3% year over year increase from last year. My discussion of the senior exchange traded FCZ is mostly in posts from last December: /FCZ

3. Johnson & Johnson (not owned): If I owned JNJ, I would not be satisfied with its third quarter results. Sure, it reported earnings that beat expectations by 7 cents. But, sales decreased by 5.3% year over year, missing the consensus forecast, and earnings grew a more than modest 2.6% on a diluted basis. The company did raise its earnings target for the year to $4.54 to $4.59. JNJ is the kind of company, however, that the Old Geezer would be interested in buying, at a lower price, based on its financial strength, relatively modest P/E and its dividend.

4. Bought 50 SCEDN at $84 (See Disclaimer): First, let me emphasize that this is a thinly traded issue on the pink sheets: Quote Southern California Edison Co. - SCEDN This security is a non-cumulative, perpetual equity preferred issue from the electric utility Southern California Edison, part of Edison International (EIX). Edison International So it starts off in my analysis with three powerful negatives: perpetual, non-cumulative and equity preferred (low priority, just senior to common stock)

This security has a fixed coupon until April 30, 2010 at 5.349%. It just went ex dividend and I believe it has only one more quarterly dividend payable at that rate in the first quarter of 2010, so that fixed coupon is no longer relevant in my opinion. SCEDN then transforms into a floating rate equity preferred issue, and the float is what interests me. Edison has to pay a spread of 1.45% over the highest of the 3 month LIBOR, the 10 year U.S. treasury CMT and the 30 year treasury CMT. Edison has the right to call after 4/30/2010 which coincides with the start of the floating rate provision and the end to the fixed rate coupon. Edison would have an incentive to call when one of these rates becomes sufficiently high that it would make financial sense to redeem this security. This alleviates some of my concern over the otherwise perpetual nature of SCEDN. Par value is $100.

This is a link to the prospectus: Prospectus Supplement

The 30 year treasury is the highest rate now at around 4%. If the float was in existence now and the applicable rate on a timing basis was 4%, as provided in the prospectus, then the coupon rate would be 5.45%, slightly better than the actual fixed coupon rate now. At a total cost of $84, a 5.45% coupon annualized would yield 6.488%. But, that is not what interests me about this security. I think that it is important to think ahead on this one, and try to look out a few years.

The Federal Reserve's web site has the CMT historical yields for the the 10 and 30 years bonds, and I would anticipate that the 30 year yield will surpass the 10 year most of the time, except when there is an inverted yield curve.

This is a link to the CMT date on the 30 year since 1977: www.federalreserve.gov/ I did not do a study of the average or median rate. A reasonable historical average over that period, just as a guess, would be 6 to 6.5%. At a 6.25% 30 year rate during the pertinent computation period, the coupon on this floater would be 7.7% and the yield at a total cost of $84 would be 9.166%. So, I like that float over the 30 year treasury.

The 10 year CMT history since 1962 can be found at www.federalreserve.gov.

While a prolonged period of high 30 year rate, say over 7% may cause EIX to redeem this security, another possibility is a long period of a high 3 month Libor rate. This is the link to the historical LIBOR rates since 1989 that I have given in the past: LIBOR Rates History (Historical) While there is certainly no guarantee that EIX will want to redeem under those types of adverse rate scenarios, it does suggest at least the possibility of a redemption down the road.

Southern California Edison has some cumulative preferred stocks with low coupons where there is a less likelihood of redemption compared to SCEDN. These securities are yielding in the general range of 5.25% to 6%. While SCEDN is not cumulative, the current yield is better with upside potential in the coupon rate while the other preferred stock issues from Edison are fixed coupons. SCE.PRE Stock Quote - Southern Calif Edison Co PFD 4.78% SCE.PRD Stock Quote - Southern Calif Edison Co PFD 4.32% SCE.PRC Stock Quote - Southern Calif Edison Co PFD 4.24% (the quantum site refers to them as cumulative, and I have not made an attempt to verify since those securities are totally uninteresting to me)

Quantum lists all of these preferred stocks as paying qualified dividends: Preferreds eligible for the 15% Tax Rate Table - QuantumOnline.com

I have more comfort buying a preferred stock from an electric utility than I would a bank. I would not anticipate that Edison would cease paying a common stock dividend. As long as a cash common stock dividend is paid, the preferred dividends have to be paid. This would render the distinction between cumulative and non-cumulative moot, though I would of course still much prefer to have a cumulative preferred stock all other considerations being equal. In this case, SCEDN is paying more now than the other preferred stocks, has a greater likelihood of redemption at par value, and has a lot of scenarios for increases in the coupon.

I am familiar with the operations of Edison. Personally, I would prefer that it only had its regulated California operation. The midwest merchant business, which owns a bunch of coal plants, is not that appealing to me. That operation was driving growth prior to mid 2008 when the recession caused a collapse in electric energy prices.

Edison provides links to the prospectuses of its securities at Edison International: Investor Relations: Selected Documents SCEDN is the $100 par value series A listed on that page: www.edison.com series a.pdf

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