Thursday, June 23, 2011

DUK/Mortgage REITs/SOLD 50 of the TP JWF at 25.06/Exchange Traded Bond Table

Duke Energy (own) increased its quarterly dividend by 2%. The new rate will be 25 cents per share. I am reinvesting the dividend to buy additional shares.  While DUK are part of my core electric utility strategy, I did recently pare my position to take a profit and to reduce my average cost per share using FIFO accounting. Pared 50 DUK at 18.42 (March 2011 Post). My long term average cost per share is now $15.03.  

The Supreme Court rejected efforts by local governments to regulate emissions from utilities, basically holding that the EPA had jurisdiction. Bloomberg This is an important victory for utilities that are heavy uses of coal who have been sued by several states for alleged violations of state emission laws. American Electric Power v. Connecticut, 10-174.pdf

Randall Forsyth wrote a worthwhile column on the advantages and disadvantages of Mortgage REITs, who borrow money short term to buy mortgage securities. The current low short term rate environment is beneficial to these companies. I own 200 shares in an ETF that owns Mortgage REITs as well as some bank stocks. iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM  (66.86% Mortgage REITs as of 3/31/2011: Fact Sheet/pdf)  It is very heavy into Annaly Capital (NLY) at around 22.6% of net assets.

I also have a small position in American Capital Agency (AGNC) in the ROTH IRA, and hope to exit that position at some point with a gain of one dollar or more after collecting a few quarterly dividend payments.  If the current quarterly dividend rate was maintained for an entire year, which is always open to question for this type of company, the dividend yield for AGNC would be around 19.4% at a total cost of $28.85, the close from yesterday.  So a one dollar gain on the shares would result in an excellent total return. Bought AGNC at 29.29 AGNC went ex dividend for its quarterly distribution of $1.4 per share on 6/21/11, which was my second dividend since purchasing a position.

After the close last night, AGNC announced a stock offering, selling 43.2 million shares for approximately 1.2 billion in proceeds. American Capital Agency  If my math is correct, that is $27.78 per share. So I would expect the stock to decline today.  The timing may have had something to do with the FED's statement released yesterday.

After digesting the Fed's statement released yesterday, which downgraded their assessment of the economy, the stock market headed south. FRB: Press Release--FOMC statement--June 22, 2011 The lower forecast is contained in a the following table: The WSJ does a good job of comparing this last FED statement with the one released last April. The FED intends to continue its JIHAD against savers and responsible Americans for an extended period of time. The continuation of abnormally low rates is beneficial to those firms who borrow short term to buy higher yielding assets.

1. Sold 50 JWF at $25.06 on Wednesday (see Disclaimer): JWF is a trust preferred stock that has a 5.625% coupon on a $25 par value.  JWF is a typical trust preferred. Interest payments are made quarterly and JWF just went ex interest. In effect, JWF is a junior bond from Wells Fargo (WSF) which matures in 2034.  I bought those shares at a total cost of $9.55 on 3/6/2009:

50 Shares of JWF at Average Cost per share of $9.55
It is possible that WSF may redeem this security since it will have to phase out the use of TPs as Tier 1 equity capital.

Generally, a trust preferred security represents an undivided beneficial interest in junior bonds owned by a Delaware Trust. The bonds will be from one issuer. Both the TP and the underlying bond will mature at the same time and have the same basic terms.  The TP is sold  to the public to raise funds to buy the junior bond.  The trust is formed by the entity that sells the bond, usually a bank. If the TP met certain criteria (see Item # 8 Added 50 of ABWPRA), the bank could use it as Tier 1 equity capital and deduct the interest payments made in connection with the bond.  Financial reform ended this absurd practice of treating a bond as equity for banks with over 15 billion in assets as of 12/31/2009. Trust Preferred Securities & Financial Reform Trust Preferred Securities: Links in One Post Regular Preferred and Trust Preferred

I decided to harvest my 160%+ long term capital gain in JWF rather than to risk losing any part of it.  The long term capital gain will exceed 10 years of interest payments on those 50 shares. I previously harvested profits on another 50 share lot bought around the same time.

2. Exchange Traded Bond and Preferred Stock Table:  Since I last posted this table, I have suffered a number of redemptions, either by the issuer or the owner of the call warrant for trust certificates.  I have included a variety of securities in this table, including TPs, trust certificates, synthetic floaters, baby bonds, "principal protected" unsecured senior notes, and equity preferred stocks. I include equity preferred stocks since their bond characteristics are more dominate.

Among the equity preferred stocks are a few cumulative REIT preferred, where I have reduced by exposure to virtually nothing.  I still own the non-cumulative equity preferred floater issued by Met Life that was bought during the Near Depression.  I have also sold most of my European hybrids, keeping a few bought during the Dark Period. All of these securities are traded on the stock exchange and are consequently easier for small investors to buy and sell. The synthetic floaters will only be bought in retirement accounts due to tax issues.  More about these securities can be found in the following Gateway Posts, and the links provided therein.

Exchange Traded Bonds
TRUST Certificates: Links in One Post
Advantages and Disadvantages of Equity Preferred Floating Rate Securities
Synthetic Floaters
ING HYBRIDS: Links in one Post
Aegon Hybrids: Gateway Post
Trust Preferred Securities: Links in One Post
Floaters: Links in One Post

This portion of my portfolio did increase in value yesterday. More lengthly discussions about exchange traded "principal protected" notes can be found in a variety of posts:  Principal Protected Notes (April 2010 Post); Bought 100 MDC at 9.84 (April 2010 Post); MKN Closes with a 25.56% Gain (March 2011); Bought 100 MKN at 9.85;  MOU Ends Second Annual Coupon Period With a 27.93% GainBought 100 MOU at $10.12 (April 2010); Item # 2 Principal Protected Notes (May 2010); Stocks & Politics: MTY (May 2011).  

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