Would you put this in your portfolio if yields were reasonable?
Or maybe ETF basket versions? These are yielding 6.5%-6.9%.
I really like prefs, but not for the usual reasons. Exchange traded prefs are very retail and have more inefficiencies in my opinion. I have owned PGF and PFF on several occasions, not usually for yield but b/c they get abused during volatile times. All those retirees with self-directed IRA’s pour outta these things at a spectacular rate when things get nasty. At worst, I’m getting paid pretty nicely while I wait for my capital gain. Personally, I really like prefs when I can pick stuff up > 20% discount to par. I’m looking for default risk, not interest rate risk (including prefs with suspended divs). They trade like equities and when sh*t hits the fan it becomes a binomial choice, it’s should go to zero or par in the LT. This is just my strategy with them, but I think they are an underrated class in general.
Hmm interesting. Where do you find the non-exchange traded stuff?
not enough reward compared to common and not enough protecton compared to bonds…but if you can get a 8%+ yield…why not…thing is, i can fnd securities yielding 3%+ with upside on capital gains…why would i buy a pref at 6%?
Agreed. In no way a recomendation…but I picked up GE at around 15 earlier this year. Now at 19 and div yield of 3+%. I pick up cap gains and yield so I am happy. Gonna dump around now though before Europe implodes.
I dont think I would be a buyer at under 7%. The last time we had a really big dip I bought a lot of the variable rate preferreds (among others…tried to buy many types), since they should keep pace if the short rates start rising, and right now you can get some of them in the 5-6% range based on their minimum floor rates. If you get some high stress times you can get 6-7%, with potential for a rise/call to par for gain.
One thing I may look into is the exchange traded debt for some of the BDC’s, if Europe causes a big mess. I think those will get heavily discounted, far beyond what they should. Especially if you stay with some of the bigger BDC’s that have shown the ability to navigate tough times. We’ll see.
Not for me but for investors who need the income I like them for their yield and tax efficiency. The alternatives are corporates at 2-3% or common stock which are more volatile. I’ve considered call writing strategies as well inorder to generate income in a common stock portfolio, anyone have any insights into this strategy?
I guess a HY fund might also be appropriate for an investor who needs the yield and is agnostic as to credit risk.
Income, for you and me we wouldn’t touch PS because they don’t fit our mandate, but if we were an IA or fund manager targeting the retiree market an allocation to PS is a fairly good strategy.
I think it’s a mistake to simply look at the income piece. I believe these ETF’s own Bank preferred stocks which can be called, (idk too much about the capital regulation stuff). It’s better to buy individual issues and do your due diligence the way you would for a bond. Think Ben Graham. You’ll find that when you do dig in, there’ll be a good reason why the yields are so high.
Frank are you still long STD? Speaking of preferrreds, their preferreds look attractive (if your fundamental thesis holds out). But i think Spain will leave EuroZ before Greece will.
yes, still long STD and will continue to do so for the foreseeable future…got in recently again (think i told you) at 6+ change…
.thing is, the stock is yielding over 10%+ with a lot of upside to the stock…i know i’m touting my own horn here, but given prices today, i see 30%+ returns over 12 months (if Euro doens’t explode)…i won’t state my target price here, but assuming the stock down the line (2-5 years) goes back up to book value you can kinda guess where it should be trading at (this requires them to have consistently solid returns on book of 12-14% which they have stated)
.the stock at the moment and problably in the intermediate term will trade on sentiment based on Spain (which is great)…as we have seen over the past 4 weeks, santander has been holding in buisness wise…no mention of them of them needing a bailout or their real estate/mortgage portfolio running into problems (yet)…central to my thesis is that they’re the best bank and if banks in spain gets into trouble, the weaker ones will go first (which they did) and will require a bailout which helps to settle the market…
…ultimately, in bank investing, i see buying the best as imperative…the stock trading at tangible book is a great deal and the best i can find in Europe…
Frank, how do you assess the quality of their loan/mortgage portfolio, for all we know it could be junk and BV is over valued as a result. This is not a critique I just want to learn from your insight.
Are you just looking at Santander as a relatively good asset in a sea of bad? And your assumption is that when the inevitable bailout does occur it will be the catalyst for STD’s market price to pop to a much higher intrinsic value because it has unnecessarily been beaten up? That sounds like a pretty good thesis but how did it originate? I am trying to pick your mind…
so one thing to keep in mind and others may disagree, but the WHOLE euro banking system will not collapse…a few banks here and there (mostly weak) will, but not the whole system…therefore, it makes sense to me to buy the best at good prices assuming a rescue will come when a few fails…
on quality of mortgages: comparative analysis and capital adequacy…my assessment is that they’re above their peers in coverage, non performing loans etc…they also have the capital adequacy to withstand a level of pain that would cripple its peers…this does not mean that they cannot get into trouble…from that, i glean that their portfolio is above average and in the event they get into trouble, others would be in far worst shape…
santander is a high quality bank with above average performance metrics (i let you name it)…when things “normalize” wayyyy down the road (if), you get earnings boost during the time and a revaluation on their multiple…witha 10%+ dividend some can afford to wait it out…the key thing here is the quality of their franchise does not deteriorate and it does not stop them from executing their strategy (recently they gained top 3 share in Poland, a good sign that they’re not retrenching)…
Good writeup, not knowledgeable to comment on the micro picture, but what about the macro? I know value investors avoid macro thinking, but how do you envision various Euro scenarios affecting your estimate of intrinsic value? The bank may be sound but what if some of their counterparties go down etc etc/Euro devaluation/exit/other such events?
the reason i committed this error was due to a lack of macro thinking…so that is something i always keep in mind now…should have known this going in but banks are problably the most intricately linked to the economy and more so to the politics of the day (regulation etc)…
if Euro goes down (breaks up) than i’m pretty much screwed on this as the bank might be able to pick itself back up, it’ll take years for everything to fall in place…the biggest issue with the euro breaking up from this vantage point is “how much the euro denominated debt worth (all the banks have huge portfolios of sovereign debt, some more than others but enough to wipe out your equity)?”…however, if the euro goes down, santander won’t be the only victim…you can kiss 50%+ of the banks goodbye (so i figure…)…
i will go on record and say i don’t think the euro breaks up…its too easy to stick together…
It really boils down to whether Germany loves the Euro enough to bail out the southerners (and possibly the French).
I don’t think the Euro Zone will break up. If you ask me, it’s unlikely that even Greece will leave. An independent currency for Greece will immediately get devalued by half or so in the open market (the New Democracy party claims a 75% expected devaluation. They have incentive to exaggerate this, of course). Anyway, if this happens, I hope the Greeks like olives and tourism, because they won’t be able to afford many imported goods.
Germany and France can’t or won’t be able to bail out everyone, especially now that Mr. Hollande’s party holds a government majority. The only other outcome is unprecedented regulation or intervention at the Euro Zone level. This would be difficult, given the fractured nature of European politics. However, when faced with imminent disintegration of the currency union, I believe that the politicians will force themselves to take action.
Of course, the timeline for all this stuff to play out is uncertain. Most likely, it will be years (decades?) before we see the last of this.
if the euro breaks up, US companies will suffer…how many times did we hear in Q1/12 how our earnings were down cause of Europe?
I don’t see how investing in preferred is worth it unless the yield is there. The corporate bond market offers more protection is more liquid; with common stock an investor enjoys the benefit of capital gains. In a bankruptcy situation, I don’t think preferreds get much, if any, of their investment back.
in the case of San, it doesn’t make sense, but sometimes it makes sense depending on where everything else is trading…
Palantir, i might get in on MSFT along with INTC and GOOG…
Since they’re now all so closely interdependant the hope is the Germans realize that and aren’t characteristically German about the issue, lol.
Either way, a correct and complete solution to this problem will take years upon years to figure out and negotiate and I really don’t think they have the stamina to engage in those discussions nor do they really have the latitude to resolve the issue given the fact that they are in a crisis NOW. Either way, it really appears that the monetary union was poorly executed and they expanded membership far too fast. It’s interesting to note that France and Germany were the first to reneg on the financial stability pacts and are now dictating the terms that countries on the periferary must abide by to receive aid. I remember having a Portugese economics professor back in 2003 who railed against the Germans and French for their transgressions and mentioned that this type of issue was a likely outcome.