Friday, July 20, 2012

United Refining/Proceeds Received from U.S. West Communications 2023 Bond Redemption/ Continuation of Discussions Re: Broker Price Differences For Reinvested Dividends

An article published by Reuters earlier this week maintained that central bankers were considering dropping the LIBOR rates unless the setting of those rates can be radically reformed. Apparently, some kind of confab is going to be held in September to discuss the matter.

I doubt that large financial institutions could ever be trusted to accurately report those rates, and the recent scandal adds further support to that opinion. These people are not worthy of anyone's trust. One columnist called  it the "‘Lie’-bor" rate. The complaint filed by the Commodity Futures Trading Commission against Barclays provided an extraordinary amount of detailed information to show how the Libor rate settings were manipulated by financial institutions for their own financial gain. Complaint pdfNYT I doubt that putting a bevy of regulators in their offices would cure the Masters of Disaster of their innate tendencies and general pathologies.  

Since I own a few floaters whose coupons are or may be tied to the 3 month LIBOR rate, I was curious what would happen when and if that rate was scrapped altogether. 

I have only looked at the issue preliminarily since the issue is still up in the air. I will need to do more research in the event LIBOR rates are no longer allowed to be published, which seems both unlikely and extreme to me.

I made a snapshot of the process that would be used in GSPRD to determine the applicable LIBOR rate under that prospectus:

GSPRD Prospectus Excerpt

I only own 50 shares of this equity preferred stock which pays the greater of 4% or .67% above the 3 month libor rate on a $25 par value.

I received this morning the proceeds from an issuer redemption of an investment grade senior bond issued by U.S. West Communications. I owned two bonds, with 1 of those bonds held in a ROTH IRA and the other in a taxable account. The following snapshot was taken from the taxable account: 

United Refining reported net income of $68.1 million for its fiscal quarter ending 5/31/12. Press ReleaseForm 10-Q. While this is a private company, it does have one senior secured bond that matures in 2018 which is available for purchase by the public. FINRA Information I have sold my 3 bonds. SOLD 3 United Refining 10.5% Senior Secured Bonds at 104.125Bought 2 United Refining 10.5% Senior Secured Bonds Maturing 2/28/2018 at 94.5Bought 1 United Refining 10.5% Senior Secured Bond Maturing 2/18/2018 at 97.25 I still have it in some family member accounts and in my late father's testamentary trust.

Select Income REIT is ex dividend today. Government Properties Income Trust was ex dividend yesterday. I own both, though I recently pared my GOV position. Sold 50 of 100 GOV at $23.45

The treasury auctioned a ten year tip yesterday at a negative yield of -.637, the 4th straight auction of TIPs that produced a negative yield for those eager buyers.

1. Continuation of Discussion on Prices for Reinvested Dividends: I started discussing this topic in a post from last Sunday. Differences in Prices Among Brokerage Firms for Reinvested Dividends

For the same dividend, I have found that there is a variance in price among brokers for reinvesting that dividend. Sometimes, the disparity is substantial and would make a material difference to an investor with a large position who reinvests the dividend over several years. 

I can only compare the price where I have the same security in two or more accounts and have reinvested the dividends paid by the same company. 

Based on my review of several accounts, I have not found a single instance where the same price was used by two firms. My sample is sufficiently large that it would be fair to conclude that the price will always vary. For some reason, this was not known to me until recently. 

The accounts are held at Fidelity, Vanguard, Charles Schwab and Sharebuilder.

Vanguard explained the reason for the variations as follows:

Vanguard Response
I understand what they are doing. The reinvested shares are bought at a market price placed at the open of trading on the payable date. That price could be lower, provided  the price on the payable date is sufficiently lower than the price available with the DRIP plan. That price would generally be determined before the payable date.

Fidelity first told me that they make open market purchases three days below the payable date:

Fidelity Response
I thought that this may be the better approach, but wondered why they would be using their own funds to make the purchase before receiving the dividend payment. The opening price on the payable date may be gamed by those who know that funds are buying at that time. This may be a worthwhile subject for a study by some academic. I noted that, in most cases where I can make a comparison, the price was higher on the payment date than three days earlier.

I then made a subsequent inquiry on a few issues, including whether I would be enrolled in DRIP plans that offer 5% discounts, such as the one for Bridge Bancorp (BDGE):

I was please to hear that Fidelity would enroll its customers in some DRIP plans, but only for approximately 100 securities included in the Depository Trust Company Discount Plan. So, Fidelity would enroll me in DRIP plans where available, and I would receive any applicable discount. This would account for the large difference in the BDGE reinvestment prices among brokers. However, the remainder of the reply added to my growing consternation on this issue. The representative added that Fidelity would otherwise buy the shares in the open market on the dividend payment date, not three days earlier as mentioned by the previous representative:

Fidelity Response # 2

I give up.

I have decided to cease reinvesting dividends, paid by exchange traded securities, in all Vanguard accounts. I will continue to reinvest dividends paid by Vanguard mutual funds. I have severely curtailed reinvestment in the Schwab account. I cut back the reinvestment option in Sharebuilder to two securities. And, I change a few options to cash at Fidelity. If anyone can make more sense of what is happening, please leave a comment or send me an email.

In cases where I have been reinvesting the dividend, I will aggregate the dividend payments and then consider using those funds to make an odd lot purchase myself at an opportune time.

The following is a compilation of prices for reinvested dividends:
Adams Express (ADX):

ADX Schwab $10.1273
ADX Fidelity $10.4215
I currently own 750+ ADX shares in my Fidelity account. I quit reinvesting the dividends.  I will aggregate any future cash payments and then purchase an odd lot when the discount to net asset value exceeds 15% and the purchase price is below my total average cost per share. 

ADX Historical Prices

Blackrock Core Bond Fund (BHK)

BHK Fidelity $13.2575
BHK Vanguard $13.4428
BHK Historical Prices 

Bridge Bancorp (BDGE):

BDGE Fidelity $18.7454
BDGE Schwab $19.664
BDGE Vanguard $19.625
BDGE has a 5% discount for reinvested dividends: 
5% Discount for Reinvested Dividends (2nd sentence)
Bridge Bancorp, Inc. Reports Second Quarter 2010 Results (Nasdaq:BDGE) If the broker acquires the shares in open market transactions, then the customer will not of course receive the DRIP discount.  The prices from Schwab and Vanguard indicate that those firms did not enroll their customers in BDGE's DRIP plan. 

BDGE Historical Prices

Exelon (EXC):

EXC Fidelity $38.4696
EXC Vanguard $38.657

Fauquier Bankshares (FBSS):

FBSS Schwab $12.6962
FBSS Fidelity $12.58

First Financial (FFBC):

FFBC Fidelity $16.8718

FFBC Vanguard $17.095588
FirstMerit (FMER): 

FMER Vanguard $15.321
FMER Fidelity $15.295
FirstNiagara (FNFG):

FNFG Fidelity $8.718
FNFG Sharebuilder $8.48

FNFG Historical Prices 

France Telecom (FTE):

FTE Sharebuilder $13.22
FTE Vanguard $12.93175
(Please note that Sharebuilder withheld 30% to pay the foreign tax while Vanguard withheld 15% and provided the better reinvestment price)  

FTE Historical Prices 

Gabelli Gold and Natural Resources (GGN):

GGN Fidelity $15.2285
GGN Vanguard $15.89
Prices three days before 3/23/2012 were in a range of $15.99-$16.07. GGN Historical Prices  The opening price on 3/23 was $15.87. 

General Electric
GE Vanguard $19.775
GE Fidelity $19.465
GE Historical Prices 

General Mills:

GIS Fidelity $38.7963
GIS Vanguard $39.12
Guggenheim Canadian Energy (ETF)(trust accounts):
ENY Fidelity $14.264
ENY Schwab $14.836
ENY Vanguard $14.86
The price three days before 6/29 was between $13.77-$13.9 which does not explain the Fidelity price. ENY Historical Prices

Medtronic (MDT):

MDT Schwab $38.0299
MDT Vanguard $37.41

Renasant (RNST):

RNST Vanguard 16.3778
RNST Sharebuilder 16.28

Solar Capital (SLRC):

SLRC Vanguard $22.45
SLRC Schwab $22.229

Trustco Bank (TRST):

TRST Fidelity $5.268
TRST Sharebuilder $5.46
TRST Vanguard $5.49789
Valley National (VLY):
VLY Fidelity $10.394

VLY Vanguard $10.76
VLY Schwab $11.0169
VLY opened at $10.68 on 7/2 and did not trade higher than $10.94 that day. VLY Historical Prices The price range three days earlier was between $10.23-$10.5.

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