Tuesday, November 24, 2009

3rd GDP Revised Down to 2.8%/MDT & HNZ Earnings/UBSI Dividend Raise/More on ZBPRA/EHL/ Case Shiller Index

1. GDP: The first revision of 3rd quarter GDP was released this morning. GDP was revised down to 2.8% from the prior estimate of 3.5%. News Release: Gross Domestic Product Consumer spending was revised down from 3.4% to 2.9%. It is going to take a long time to recover from the Near Depression. It may take as long as 5 to 7 years to recover the jobs lost from October 2007 to the date the U.S. shows its first monthly job gain sometime next year. This is my current view, always subject to change based on new data, and it dictates the overall strategy going forward of continuing to emphasize the purchase of income generating securities, other than low yielding treasury notes and bonds.

2. Medtronic (owned): Medtronic reported earnings for the 2nd quarter of its fiscal 2010 year of 78 cents (.77 non-GAAP), on a 8% increase in revenues on a constant currency basis. This beat the consensus forecast of 74 cents. Medtronic also raised its forecast for fiscal 2010 to $3.17 to $3.22 from $3.1 to $3.2. The Old Geezer, acting Head Trader, was trying to remember what the game plan was for Medtronic, and may need to request LB's assistance on that issue. MDT is trading up over $3 per share in early trading today. ADDED: LB replied that it had calculated $50 as a potential upside target back in September: Item # 7 Added to Medtronic

3. United Bankshares (UBSI )(Own): This is one of the banks that I placed in category 2 of my bank stock purchases, as explained in yesterday's post. United Bankshares increased its dividend yesterday for the 36th consecutive year. The quarterly increase was from $.29 to $.30 per share. UBSI noted in the release that its dividend had increased at an average rate of 9% per year over that 36 year period. At a 9% rate of increase, a dividend will double in 8.04 years. While the rate of growth may be slower in the future, and is ultimately unknowable now, UBSI is still a relatively small bank with a market capitalization of around 750 million, and it is included in the S & P 600 small cap index. I discussed my purchase in a blog dated 11/17: Bought 50 of UBSI UBSI is one of the banks that refused TARP money. MONEY magazine ran an article in September about how the stocks of banks which refused government bailout money have outperformed those who received TARP funds. UBSI is up almost 4% in early trading this morning.

4. Entergy Louisiana (own First Mortgage Bond-EHL): I noticed that this subsidiary of Entergy issued some more First Mortgage bonds recently. www.sec.gov/ The new issue was for 400 million with a 5.4% coupon and a 2024 maturity date. EHL which I own has a higher coupon of 7.6% and is currently selling at over its $25 par value. It is possible that some of the proceeds might be used to redeem outstanding bonds. At a minimum, that possibility will keep me from buying any additional shares of EHL above par value. My existing holdings were purchased last October at $22.75: END OF DAY TRADES (IR, INTC, TE AND EHL)

5. Saturday Night Live Skit of Hu Jintao and Obama Joint News Conference: Video - NBC.com This is a funny and scorching satire of Obama's policies, and raising a few interesting points with the comedy.

6. EX Interest or EX Dividend: For Wednesday 11/25/09, I noted that the following securities which I own will go ex dividend or ex interest. Both XFL an PJL, the TCs containing the same Verizon senior bond, go ex for their semi-annual interest payments. EMO, the first mortgage bond from Entergy Mississippi, goes ex interest on its quarterly payments. Some of the synthetic floating rate securities, which make monthly interest payments, GJN and GJT, will go ex. GJN has a guarantee. The TP from Zions, ZBPRB, goes ex with its quarterly interest payment. METPRA, a floating rate equity preferred from Met Life, goes ex dividend with its quarterly payment. GXP, an electric utility, goes ex dividend. And lastly, KTV, a TC containing a TP issue from First Union, goes ex with its quarterly payment (First Union was acquired by Wachovia who was in turn acquired by Wells Fargo) Rounded KTV to 100 Shares When I look at the WSJ dividend page each night (Dividends - Markets Data Center - WSJ.com), I sometimes see one or two securities that look interesting to me that I do not own, which is another reason for this exercise.

7. Zions Offer to Exchange Common Stock for ZBPRA (own): My shares of ZBPRA rose almost 25% yesterday on Zions second offer this year relating to those shares. I refused to tender my shares in response to the dutch tender offer which was completed at a $11.5 price for this $25 par value floating rate equity preferred stock. Form 8-K
I am not going to participate in this second attempt to get rid of ZBPRA shares on the cheap. Besides, I would rather own my ZBPRA shares bought at $7.8 than common stock currently paying a penny a quarter in dividends. At my cost, the guarantee provided by ZBPRA is worth almost 13% to me. Bought 100 ZBPRA at $7.8/Corrections Corporation Earnings I will receive a higher yield when 3 month LIBOR rises above 3.48% during the relevant computation period set forth in the prospectus. My ZBPRA is in parity with the government's preferred stock and senior to the common stock. As long as dividends are paid on the common, Zions has to pay me and the government. And, it would have to defer paying the government its dividend in order to eliminate the non-cumulative dividend for ZBPRB. I go into these issues in great detail in an earlier post: See Item # 7 Bought 50 ZBPRB in Roth at $19.9

In the SEC filing for the exchange, Zions make it clear that ZBPRA is a parity stock with the government's preferred D:

"Shares of the Series A Preferred Stock rank senior to our common stock, equally with our Series C Preferred Stock and Series D Preferred Stock and at least equally with each other series of our preferred stock we may issue (except for any senior series that may be issued with the requisite consent of the holders of the Series A Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock and any other class or series whose vote is required) with respect to the payment of dividends and distributions of assets upon liquidation, dissolution or winding up." Page 33 Offer to Exhange

I have previously discussed the stopper provisions and the exchange offer filing summarizes this important provision for the equity preferred owners:

"So long as any share of Series A Preferred Stock remains outstanding, on any day during a dividend period (1) no dividend shall be declared or paid or set aside for payment and no distribution shall be declared or made or set aside for payment on any junior stock (other than a dividend payable solely in junior stock), (2) no shares of junior stock shall be repurchased, redeemed or otherwise acquired for consideration by us, directly or indirectly (other than as a result of a reclassification of junior stock for or into other junior stock, or the exchange or conversion of one share of junior stock for or into another share of junior stock, and other than through the use of the proceeds of a substantially contemporaneous sale of other shares of junior stock) nor shall any monies be paid to or made available for a sinking fund for the redemption of any such securities by us, and (3) no shares of parity stock shall be repurchased, redeemed or otherwise acquired for consideration by us otherwise than pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series A Preferred Stock and such parity stock except by conversion into or exchange for junior stock, during a dividend period, unless, in each case, the full dividends for the immediately preceding dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or declared and a sum sufficient for the payment thereof has been set aside." Page 28 Offer to Exhange

The terms of the exchange offer is contained in this recent filing with the SEC: Offer to Exhange So why would I give up ZBPRA for common shares paying me almost nothing, and what I would view as another miserly offer to boot? The LB says no and HK concurs. The OG was too busy trying to finish Taleb's book, Fooled by Randomness, which contains a lot of philosophy, to offer an opinion on such mundane matters. OG has made it to page 45. After all OG added, HK named the LB the new acting Department Head in Charge of Responding to Exchange Offers, a post that gives it plenty of opportunity to be a Nerd and to show off.

Separately, Zions said that it would be seeking a tax refund for a substantial majority of the 340 million in federal income taxes paid in 2007.

8. Heinz (owned): This was one of the consumer staple stocks bought in March 2009 : Buy of HNZ at 31.67 Heinz reported earnings for its 2nd quarter of 76 cents from continuing operations, better than the consensus forecast of 69 cents. While earnings were down 10 cents from the second quarter of fiscal 2009, that quarter included an 18 cent gain from currency hedging. Heinz also increased it earnings estimate for fiscal 2010 to $2.72 to $2.82 from $2.6 to $2.7.

At the current quarterly dividend rate of 42 cents ($1.68), the yield at a total cost of $31.67 is around 5.3%. Heinz has an erratic dividend history from my perspective. Based on the VL data, it was raising the dividend every year starting in 1993 to 2002, when it reached $1.6 per share. The dividend was then reduced all the way back to $1.08 in 2003. Since then it has been raised every year and finally worked its way back to a tad more than the level in 2001. The pay out ratio is close to 60%. I would put this holding in the category of a hold provided the dividend is raised every year.

9. Case Shiller Index: The index for 20 large metropolitan cities rose .3% in September. www.standardandpoors.com The 10 city composite was up .4%.

10. 2 Year Treasury Note Auction: The 2 year note was auctioned yesterday to yield .75% on the coupon and .802% with the OID. www.treasurydirect.gov/ This was for 45.321 billion in 2 year notes. The weekly 3 month treasury bill was auctioned at .04%, in effect and for all practical purposes free money for the U.S. government. http://www.treasurydirect.gov .pdf

The volatility index for the DJIA, VXD, is currently under 20 again.

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