Preferred Stock Investing-The Good , The Bad and The In Between 2015 - 2020

[Slow But Steady]

CBB-B closed at $47.90 yesterday. I see no news. Is anything up?

 

[RE2Boys]

Good Morning Everyone,

I recently retired and my Edward Jones guy is asking for more of my $$. He has not performed well for me.I would prefer to do my own investing. I have about 105k in what I consider good dividend stocks EPD F WY T CSCO DUK LNT SO GE and I just bought some FTR I know the latter is a more risky, I will add to these holding with dividend reinvestment.

I will be receiving 8k net a month. I have zero debt property taxes,insurance and cell phone bill. I live on a catamaran and am very frugal. I will have about 5k a month to invest. I am 54 and looking to squirrel away the $600k I will save over the next 10 years. I am not much of a gambler and like lower risk, preferred stocks interest me.

If someone could assist in pointing me in the right direction to find some reasonably safe avenues I could put some of this cash.

Thanks for your help and I appreciate your time.

Brian

Phisher,

You will get a much better response to your questions if you start a new thread rather than inserting your questions in an old and long thread discussing preferred stock investing.

 

[MooreBonds]

CBB-B closed at $47.90 yesterday. I see no news. Is anything up?

Appeared to be just a largish (for this stock) sell order, roughly 6k-7k total. The common hasn't moved much. I picked up 50 more this morning at 48.25 (already had 50, or would have bought 100)

 

[Sunset]

I noticed the price movement, and was tempted but I have about 400 already and it is a dog with flea's type according to the Master Mulligan

 

[Slow But Steady]

I already had a position, but I took another half a position at $48.05... I didn't think it was going to fill but it just did.

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

I noticed the price movement, and was tempted but I have about 400 already and it is a dog with flea's type according to the Master Mulligan

Hey, you know "dogs with fleas" can make as much or more money than a "well groomed one", lol... CBB recently went to the bond market with an 8 year $425 million senior unsecured note paying 7%. This would suggest that the preferred maybe should be trading at or below what it is now. The senior note is a weakly B3 rating. I am in no way suggesting it will not ever pay, its just not on par of financial strength of many companies discussed here. Myself, I do own $5k of a 2026 bond of theirs maturing in 2026. Largely forgot about it.
Read this link. This will give you a better understanding of how Moodys perceives them.
https://www.moodys.com/research/Moo...cinnati-Bells-new-senior-unsecured--PR_354961

 

[Mulligan]

Good Morning Everyone,



I recently retired and my Edward Jones guy is asking for more of my $$. He has not performed well for me.I would prefer to do my own investing. I have about 105k in what I consider good dividend stocks EPD F WY T CSCO DUK LNT SO GE and I just bought some FTR I know the latter is a more risky, I will add to these holding with dividend reinvestment.



I will be receiving 8k net a month. I have zero debt property taxes,insurance and cell phone bill. I live on a catamaran and am very frugal. I will have about 5k a month to invest. I am 54 and looking to squirrel away the $600k I will save over the next 10 years. I am not much of a gambler and like lower risk, preferred stocks interest me.



If someone could assist in pointing me in the right direction to find some reasonably safe avenues I could put some of this cash.



Thanks for your help and I appreciate your time.



Brian

Hello Brian. I second the Ed Jones thing. I know someone who works for them... And your money is all about what it can do for them. But, I suspect its better than someone who isnt comfortable handling investments at all. I would feel very uncomfortable steering you into preferred stocks until you research them extensively. Their is a wealth of info out there. The more you read, the more you understand the good and bad of it. Google all angles... Why preferred stocks are bad investments....Why preferred stocks are good investments, etc... They will provide income, but most are exposed to price swings and sometimes rather wildly also. Plus you are eating your food at the end of the lunch line...The bond holders get paid first. After you research you may or may not decide these to be suitable to your needs.
Dont be afraid to ask questions, but I dont think listing issues to buy is where you want to start.

 

[Slow But Steady]

As Mulligan said, preferreds are good for providing income. The sensitivity to interest rate changes can be quite high, though. Since you don't need the income for 10 years, I'm not sure preferred stocks are your best option.

Like RE2Boys said, you may want to start a brand new thread. That might provide insight from some of the many investors who don't play in this sandbox.

 

[Running_Man]

Cincinnati Bell is not an investment I would ever recommend, it is a very speculative investment and I doubt the interest compensates for the risk. Any decline in the economy and these investments are going to be in serious trouble. They are a “4” in Safety for value line putting them in the bottom 10% of the 1700 companies ability to meet their financial obligations.

 

[Mulligan]

Cincinnati Bell is not an investment I would ever recommend, it is a very speculative investment and I doubt the interest compensates for the risk. Any decline in the economy and these investments are going to be in serious trouble. They are a “4” in Safety for value line putting them in the bottom 10% of the 1700 companies ability to meet their financial obligations.

When you can now get investment grade preferreds over 6% and even 6.5%, no the 7% yield of CBB-B is not worth the risk. They have caught some financial breathing room scoring on a spinoff of a data reit (CyrusOne I believe). What they do with this cash is helping to determine their fate. They are using some proceeds to pay down debt and the rest to plow into their core business. How this succeeds will largely determine their success going forward.

 

[Coolius]

When you can now get investment grade preferreds over 6% and even 6.5%, no the 7% yield of CBB-B is not worth the risk.

So, Mulligan, do you think it would be prudent to look for an exit?

I unfortunately bought CBB-B at around $49.50, so am underwater. Should I be putting in a GTC sell order at $49.50, and get out if it does run up to that level?

 

[Running_Man]

Good Morning Everyone,

I recently retired and my Edward Jones guy is asking for more of my $$. He has not performed well for me.I would prefer to do my own investing. I have about 105k in what I consider good dividend stocks EPD F WY T CSCO DUK LNT SO GE and I just bought some FTR I know the latter is a more risky, I will add to these holding with dividend reinvestment.

I will be receiving 8k net a month. I have zero debt property taxes,insurance and cell phone bill. I live on a catamaran and am very frugal. I will have about 5k a month to invest. I am 54 and looking to squirrel away the $600k I will save over the next 10 years. I am not much of a gambler and like lower risk, preferred stocks interest me.

If someone could assist in pointing me in the right direction to find some reasonably safe avenues I could put some of this cash.

Thanks for your help and I appreciate your time.

Brian

If you look at your total portfolio the first decision to make is how much of your portfolio do you want to invest in fixed income, how much in stocks and how much in real assets (real estate, gold commodities etc). I view preferred stocks as part of my fixed investments. For myself I would never have more than 10% of my portfolio in preferred stocks as a general rule. Since you are buying individual stocks and are looking for direction I recommend a starting point of 50/45/5 50 percent stocks, 45 percent fixed income and 5 percent gold. If you are comfortable with individual stocks I would make 25% of the portfolio or half of the stock portion with individual stocks at about 2% per position. 25% in VTI or SDOG. 35% in a 5 or 10 year US treasury ladder, now may be a good time to start if interest rates are starting a cycle up. 10% in preferred stocks, but you should read the entire thread here as well as visit this site http://www.dividendyieldhunter.com

For ideas on investing in individual preferred issues. I believe in the importance to spread your investment in preferred among industries and not to be in just one industry such as finance where preferred are plentiful.

As for the 5% gold, it is investment many are against and feel it is only a drag on the portfolio, to have quick access to money that is convertible anywhere in the world on hand is to me worth having, but this is a minority opinion here for sure.

This would be the basic portfolio advice I would give to anyone asking for a reasonably conservative investment strategy with sound upside and individual selections of stocks and bonds. It is a portfolio if using SDOG instead of VTI that should yield a conservative income investor 3 percent income per year at present rates and yields.

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

So, Mulligan, do you think it would be prudent to look for an exit?

I unfortunately bought CBB-B at around $49.50, so am underwater. Should I be putting in a GTC sell order at $49.50, and get out if it does run up to that level?

Thats a tough call since you now own it. And lets be clear here. I have read enough about CBB to clearly know they are in no immediate danger at all from not paying anything, I mean 2-3 years minimum of total safety in payments and that is if things go to hell now, and they havent. They always have this additional equity in CyrusOne as a piggybank to rely on as cash flow and sell more shares out into the market. They have been a low rated company for years and years now... They are trying to build out their fiber optics and really compete hard in controlling and locking down Cinn area. and using proceeds from this CyrusOne data reit stock they basically created from luck.
Considering the risk level, it amazes me how generally this preferred gets a pass in the market. It should be yielding 8% or more in my mind. Its current price isnt so much a scare as a return to its more normal recent history price. A preferred of a company in theory should not yield less than a bond of the company. And at times recently it has. Like I said I own 5k of their 1998 issued bond that matures 2028. I really had forgotten all about it the past few months. I perceive better values now and should sell while its price is holding up, but I am not. I will either get my $5k back in 2028 or I wont, ha.

 

[Running_Man]

Analysis of Cincinnati Bell for purposes of CBB-B

Mulligan,
I agree with everything you say, but I want to reiterate how bad a deal I think the fixed income investment in Cincinnati Bell s.
1) Paying their debt back is dependent on successful capital project and future earnings growth. This means the bond is more like a stock than a bond, without any of the reward of the stock. The preferred stock is more like an investment in Cousin Fred’s new bar in Vegas.

2) CBB has $5.65 in revenue per share and $5.43 of debt for every share.

3) Long term interest is 50 million and net profit after tax and interest last 2 years is right about 10 million up from losses of 20 million per year the prior two years.

4) They also have a pension & retiree medical shortfall of 214 million dollars they are paying about 10 million per year more for funding than expense is showing up in their financials as they are required for minimum funding of their pension liabilities.

5) Obligations outstanding of preferred dividend stock 129 million dollars requiring dividends of 10.4 million per year or 100% of profits.

6) It has 400 million of debt coming due in the next 5 years of it’s total of 1.1 billion of debt, in an increasing interest rate environment. 100 million is due in the next year of which I think there is 90 million of reserved cash to pay for on the balance sheet.

7) Their accounts receivable increased by 15 million to 172 million in the most recent quarter but allowances for receivables dropped by 25% from 12 to 9 million dollars, this may be ok but is a red flag for a company that is operating on only 9 million of actual cash in the bank after the Cyrus One sale to operate it’s business.

8) Capital spending has been averaging 20 percent of revenues for years on end due to the technology changes and attempts to drive Cincinnati Bell in a new direction. They are showing an average of 8 years life on their plant and equipment but a five year life based on capital spending. This is a red flag for capitalizations of expenses that occur when a company is enduring financial difficulty, I am not saying this is occurring but the high level of capital spending and low level of profitability makes this a very appealing shortcut for managers in such a circumstance.

The major source of revenue is the sale in its data center Cyrus One on which it has recorded gains of 152 million to pay down debt to the level I just mentioned. The bad part is they had to pay income tax of 60 million due to that gain or 40% (ouch!). The gain was 83% of the proceeds from the sale of the investment.

Management then has about a 2 or 3 year window to convert the business to enough profitability to get out of all this debt that has them tied up in knots, while at the same time investing 200 million per year in capital investments in an attempt to convert itself to a new company. By then they would have burned all the Cyrus One furniture that they have available to keep their financing obligations warm. An interesting attempt though capital investors don’t like it so far most likely because of all the legacy business nooses around Cincinnati Bell’s neck. If it does succeed the big winners will be owners of the common stock which will soar in value. The preferred? It will be either called at 50 or continue to trade around $50 a share or fall if interest rates rise.

So the long term result is a 7 percent or so payout with a rather large risk of dividend payment suspensions and interest rate risk on the market and the ability of CBB to call the stock at any time if conditions were to appreciably improve.

It is not that success is not possible, merely that the return is far too low for the risk taken, this preferred in my mind should be yielding 9 percent to be worth assuming the risk Cincinnati Bell entails or $37.50 per share for the preferred.

 

[Mulligan]

That is funny you said that RM about the common stock, as I was thinking same thing. The risk/reward is a definitely a one way slant to commons.
And in the coming few years its put up or shut up time. Their best bet may be a buyout from a bigger fish wanting a bigger footprint.
Dont you agree with me, that the preferred gets more of a market pass on yield now than it should? Maybe its the QDI thing that provides its relative ballast in yield.
FWIW, they are going cash flow negative on build out, and "hope" not to be soon after that. I dont mind utilities doing this as they do it for years on end, but they get the ROE already baked in at the end of the rainbow. The fix is in there...With CBB, there is no net under the high wire act.

 

[Running_Man]

That is funny you said that RM about the common stock, as I was thinking same thing. The risk/reward is a definitely a one way slant to commons.
And in the coming few years its put up or shut up time. Their best bet may be a buyout from a bigger fish wanting a bigger footprint.
Dont you agree with me, that the preferred gets more of a market pass on yield now than it should? Maybe its the QDI thing that provides its relative ballast in yield.
FWIW, they are going cash flow negative on build out, and "hope" not to be soon after that. I dont mind utilities doing this as they do it for years on end, but they get the ROE already baked in at the end of the rainbow. The fix is in there...With CBB, there is no net under the high wire act.

I do not understand based on financials for why it is getting a market pass on the preferred, a possible answer -- as you pointed out this has been a junk stock for years on end and the holders are just happy to get their income and are using past experience to guide their investment instead of analysis. Perhaps because CBB is not a financial company an investor looking for industry diversity likes this space, but that does not change the risk profile of the company.

On the hope of the build out, my experience is that engineers use capital projects as a piggy bank and when major multi year capital projects end, the expenses now have no where to go but the income statement, unless capital controls are very strong and telecommunication companies have been ripe violators in the past of this practice.

 

[Sunset]

My gut thinking is the great rotation from bonds (and preferreds) to stocks (especially construction) due to the election promises has lead to some huge future disappointments once folks realize actually re-building America will be a lot slower to start due to many factors.
example: Setting budgets at Fed and State level (State is responsible for most road building) will be measured in years.

For this reason, I expect the Bond (and preferred) drop will rise back up as stocks drop once folks calm down and realize not a lot has changed from last month besides talk, and Fed interest rates remain where they are, or 0.25% higher.

 

[Running_Man]

Preferred stocks for investment ratings usually rate 1 to 2 rungs lower on Moody’s. For a bond rated B3 - that would mean the preferred is either Caa1 or Caa2 and here is Moody’s description:
Caa - An obligor is CURRENTLY VULNERABLE, and is dependent upon favourable business, financial, and economic conditions to meet its financial commitments.

Caa1 or Caa2 falls into the range of default imminent with little prospect for recovery for Fitch so I shudder at the idea of holding an investment at this level.

 

[Sunset]

When you can now get investment grade preferreds over 6% and even 6.5%, ......

Could you name a few, and how you determine this.

 

[Running_Man]

WFCPL rated Baa2 current yield 6.2% was offered at 6.35% last week is a common one talked about here and here is a list of them
Preferred Stock and Exchange Traded Debt - Investment Grade | The Yield Hunter
Investment grade preferreds are any preferred rated Baa3 or higher by Moody’s, BBB- or higher by S&P or BBB- by Fitch. If you don’t have an investment rating on a preferred take the bonds rating of the company and drop one to two notches for the preferred - bonds are rated higher because they have first claim on the assets of the company.

Cincinnati Bell is rated 6 notches below invest grade for the BONDS by Moody’s which means the preferred is probably eight notches below that or Caa2 one notch above imminent default

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

Could you name a few, and how you determine this.

Ailll at last trade is always one due to its yield trapped nature and no apparent call ever occurring...I just loaded up on DTZ, call risk is huge since its call date is Dec. 1, but no 30 day call notice has been sent. Its trading right at par...who cares if its called if purchased at par...You will get accrued divi and 6.5% investment grade is sweet by me...The long
Venerable issue BGE-B (talk about safe, T&D only trust debt issued in
2004, BAA1) has now sagged to under $25.30 which is below call plus next divi. I have flipped this one a lot but price got way out of hand most of this year. I bought 500 shares the other day and will gladly take the 6.15% yield.
I mostly stick to utilities and so those are the ones spotted. Im sure there may be more outside of my focus area. In this apparent rate transitional period buying making some money and still getting hit with a call doesnt bother me in the slightest.
I also bought 150 shares of GAPWP this week at $102.85... 6.5% par investment grade from Georgia Power and not callable until Oct. 2017. $1.41 divi heading my way next month.
I dont own this one, but Coolius does...SOJA (Debt from Southern Co. utility has sagged to $25.60 and yields over 6%. Isnt callable for several more years. Take a call risk and look at KCC, trust debt from insurer Unum is investment grade and over 7% now. Some fair values now if one assumes 10 year isnt spiking much more or panic is abating. I am in issues now I am not so worried about price drops if they happen. If one drops more than another I will sell and buy more of the price sagger.

 

[Mulligan]

Could you name a few, and how you determine this.

I forgot to answer your other part of question. I use Quantum as reference point to bond ratings from Moodys and S&P. I also google Moodys for updated info on bond ratings as they also go into detailed analysis I would no way be able to determine. I find ratings from agencies to be more accurate than how they rate preferreds. They really dont even rate them, they just slot them below lowest junior debt they have on the books without much analysis and freely admit that. Take the Ameren preferreds...Their entire series of preferreds from a $15 billion market cap is a smaller than one series of MNR preferreds (MNR-C) . So there is no financial stress at all to pay the preferreds if they can pay the bonds. As their preferreds are just a tiny blip on the screen of their balance sheet.
Here is a useful website for your to peruse preferreds of certain length and quality. It catches quite a few of them on the market. It misses a few of the smaller illiquids I own.
https://research2.fidelity.com/fidelity/screeners/preferredstock/main.asp

 

[Winemaker]

Oh! the humanity!
Mully, are you backing up the truck at all? Just had a 1.65% $20k cd mature on the 16th, and I have to wear my granddaughter's bib to keep the drool off my shirt.

If at all cautious, just keep your durations short.

Here is another site for info, Sunset.
Preferred Stocks Trading Under Par | The Yield Hunter

 

[Mulligan]

Oh! the humanity!
Mully, are you backing up the truck at all? Just had a 1.65% $20k cd mature on the 16th, and I have to wear my granddaughter's bib to keep the drool off my shirt.

If at all cautious, just keep your durations short.

Here is another site for info, Sunset.
Preferred Stocks Trading Under Par | The Yield Hunter

Winemaker, the truck has been backed up for three years. It just constantly rearranges the dirt in different piles. Kind of have three piles now... One pile I never pay attention too, pile two is money moved into old reliables that have got back near par, and pile three is dumped into issues that more than likely will be called in next year or so with enough meat on bone to hold, or will be a higher yielder if not called or rates spike.

 

[Mulligan]

Snagged me 85 more shares of my favorite issue today, the 7.75%... about 1000 shares have traded in the past 6 years or so, and I have got over half of them. A nice little collection permanently tossed into the ol sock drawer.