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

[Winemaker]

In 2015 the interest on the national debt was $223 billion, 6% (yes, only 6 percent! ) of the annual budget at the lowest rates in history. I believe the Fed will do whatever it takes to keep long term rates low, as not to break the bank anymore than it is already broken. Or broke.

 

[Mulligan]

Most of the Preferred stocks on my watchlist have been steady-to-higher for the past couple weeks. Was not able to buy some that I had hoped for.

I agree with Running-man's conclusion that we will be in a lower-for-longer environment for a while.

Will continue to look for sell-offs, especially with the illiquids, but not very optimistic for now, at least.

Well, I learned a lesson....Remember the Trump preferred sell off a couple months ago? Well I dont because mine never sold off...A lesson there...Next sell off with illiquids holding strong, you sell them off by the beaten down illiquids, ride them up flip out back into illiquids again. Easily said...Hard for me to let go of them though. But if a real stampede ever occurred history shows they side step much of it. No panic sellers, mutual funds, etf's, shorters, or margin buyers largely here. That is why they had no real sell off.

 

[Mulligan]

I finally found a term dated utility preferred, but boy did I have to dig deep into the preferred brush pile to find this...CNIGO ..Corning Natural Gas...State of New York's smallest of 13 regulated utilities. Bought 400 shares at $26. Its a $25 6% par, that can not be called and will face mandatory redemption 9/2023. So about 5.28% YTM. I can handle that with the backside redemption protection. It was a private placement issue for existing common shareholders who wished to purchase last year. A ticker was assigned and somebody wanted to sell 400. Only 200 shares had traded since issued to shareholders last summer.
I love reading 10k's from small companies. You can actually understand what is written. This preferred and a convertible (also private placed to shareholders) were used to help purchase Pike County Light and Power. A little gas and electric utility serving 5800 people for $13 million. Heck MooreBonds could have bought PC Light and Power by himself without a debt issue to finance!

 

[NW-Bound]

...This preferred and a convertible (also private placed to shareholders) were used to help purchase Pike County Light and Power. A little gas and electric utility serving 5800 people for $13 million. Heck MooreBonds could have bought PC Light and Power by himself without a debt issue to finance!

Hah! Some posters here can pool the money and buy a little utility like this and run it. You get all the divies without the cut of the middle men. And if you know how to climb poles to repair broken lines after a winter storm, you get to keep even more money.

 

[Mulligan]

My GF does utility mapping so all we have to do is the pole work. Though I would be a bit more aggressive in bill collecting. We would need to hire a knee cap buster for non payment issues. They got this utility so cheap they were instantly able to book a substantial book value increase on purchase.

 

[Running_Man]

Nice find Mully!

 

[Mulligan]

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

Nice find Mully!

RM, the trading platform was odd on it. A few days ago it had 400 shares offered at $26. I put bid in at $25.50, and no counter. Next two days at $25.65 and they werent willing to deal. So today I caved and he won. All this while there is a standing bid of 4000 shares at $25.10. Kind of odd since it had only traded 200 shares ever prior to my 400. I had to break it up into a 300 share purchase and then 100 because TradeKing wont allow a $10k or above Pink Sheet trade unless you call
in. After 300 share purchase, the other 100 shares disappeared showing no shares available at all. I put the 100 share bid in anyways at $26 and about 5 minutes later they were sold to me. Never showing
up on ask screen.

 

[jsrm]

A call process question

I have been slowly building up my preferred portfolio over the last two years. I have never experienced a call. I remember reading that Mulligan had a stock be called. What happens when a stock is called? Is it just like any other sale but with a predetermined strike price? Do I need to do anything?

Thanks

 

[Mulligan]

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

I have been slowly building up my preferred portfolio over the last two years. I have never experienced a call. I remember reading that Mulligan had a stock be called. What happens when a stock is called? Is it just like any other sale but with a predetermined strike price? Do I need to do anything?



Thanks

JS, If you stay totally in dark and know nothing and do nothing, it will all be taken care of and one day you will just see cash in your account. Each preferred will have its own call price. Typically it is $25, $50, or $100 depending on par price. But some are wonky especially the older ones that may give you a small premium to par. If you look at quantumonline and type in your ticker it should tell you at the bottom what each call price is.
But I have been getting lucky by staying abreast of calls and getting out the next day at a price higher before people know. Then sometimes you can even buy below call price after the call as people dump to move on. I have made some easy money doing this a bit at times.

 

[jsrm]

Thank you

 

[Mulligan]

Thank you

Hopefully you will not get a call! Calls are getting problematic as far as knowing. It seemed a few years ago the ones I tracked there would be a "public notice" , an SEC filing of event occurring, and or a notice to your brokerage. I suspect this happens but since issues are usually in street name, it may not get forwarded to you by brokerage. Now a few will just show up with out any real public notification.

 

[jsrm]

Bah!

I use quantumonline to find my preferreds. Quantumonline seems to be good about warning of an upcoming call. All of the preferreds I own are bigger names (like bac.a, wfc.l, etc) except for snhnl and govni. I own one stock that is past its call date and that is cfc.b.

Do you think I need to worry?

I do actively watch/manage my account. hmmm. I bet I will notice something is up when I don't receive a dividend. Oh, what fun.

 

[Coolius]

jsrm,

You have no call worries with WFC-L. I own this Preferred.

This is a convertible, which can only be exercised by WFC if the common trades at about twice its current price. And that is not going to happen for a very long time.

The one with greatest call probability is CFC-B; Mulligan can describe the call risk a lot better than me.

Unfortunately, I do not have any knowledge on GOVNI and SNHNL.

 

[Mulligan]

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

Bah!



I use quantumonline to find my preferreds. Quantumonline seems to be good about warning of an upcoming call. All of the preferreds I own are bigger names (like bac.a, wfc.l, etc) except for snhnl and govni. I own one stock that is past its call date and that is cfc.b.



Do you think I need to worry?



I do actively watch/manage my account. hmmm. I bet I will notice something is up when I don't receive a dividend. Oh, what fun.

Ok, Good news JSRM.... I should explain more thoroughly. If an issue is called, all dividends or interest accrues all the way up to the call date and will pay that to you also. So if you had a $1 quarterly divi and $25 was par and call price and they called halfway through the quarter the company would deposit $25.50 per share into your account. Once an issue passes call date you really have to assess the risk of how high it trades past call to decide if it is worth the risk of a call to continue owning. That is an individual choice unless one has a good incite into probability of a call.
We share CFC-B as a call concern. I own 3000 shares...Way too many for someone of my financial standing. But I find the risk/reward too appealing with that juicy 6.85% yield that is actually debt not a non cumulative bank preferred. If I can get next divi declared and watch it creep back up near $26, I will lighten my load. And then after it goes exD and if it drops close to $25.30 I will look to reload again. If it isnt called at divi distribution time, you know you are automatically 30 day call protected so that is almost 15 cents by itself minimizing call loss.

BTW- Quantum isnt the quickest to notify on calls. Usually way behind. And although I really appreciate the site, it certainly isnt the end all. Type in ticker CNIGO and see all the glorious info you get. I had to dig hard and deep into the bowels of the internet and SEC filings to determine if this issue was a good purchase before I bought.

 

[jsrm]

Oh, good to know that I will get partial dividend if it gets called

When I was reading a prospectus it talked about having to go to some New York office to redeem when the issue was called and I have no desire to have to do that. I am hoping that my brokerage firm (Fidelity is who I purchase my preferreds through because they hold my rolled over traditional ira) will take care of everything for me.

I have a detailed spreadsheet I created that keeps track of vital information such as yield to worse. I am not so much worried about when it is called as much as the process of what happens when it is called.

 

[Mulligan]

jsrm,

You have no call worries with WFC-L. I own this Preferred.

This is a convertible, which can only be exercised by WFC if the common trades at about twice its current price. And that is not going to happen for a very long time.

The one with greatest call probability is CFC-B; Mulligan can describe the call risk a lot better than me.

Unfortunately, I do not have any knowledge on GOVNI and SNHNL.

Coolius, I wish I had some real incite into it. The capitalization rules of banks are too complicated especially for a monstrosity as BAC. I wish I could act smart and lay out all sorts of reasons, but it strictly is a yield chase that is not unreasonably too far above par, very safe and worth the risk.
They have another one MER-P trading at $25.85 and yielding almost 7.15% as it is a 7.25% par. Its next divi is declared for 3/10, but they could call tomm, pay out entire payment and you still get smacked with a 40 cent loss. If MER-P and CFC-B switched prices, I would switch out and book the profit and take the higher yielder and chance it. They have called trust issues with smaller yields so there is a reason what they do, I just do not understand what it is.

 

[Mulligan]

Oh, good to know that I will get partial dividend if it gets called



When I was reading a prospectus it talked about having to go to some New York office to redeem when the issue was called and I have no desire to have to do that. I am hoping that my brokerage firm (Fidelity is who I purchase my preferreds through because they hold my rolled over traditional ira) will take care of everything for me.



I have a detailed spreadsheet I created that keeps track of vital information such as yield to worse. I am not so much worried about when it is called as much as the process of what happens when it is called.

Coolius, step up to the plate and reassure JSRM about the call procedure. You have more experience with letting it play out and can give first hand incite.

 

[Coolius]

As Mulligan has said, there is nothing - absolutely nothing - that you need to do in event of a call, as far as the redemption process is concerned.

What you have to do is monitor the forums and sec filings ( sec.gov ) for notice of a call. Usually there is a 30 day advance notice.

On occasion, I see a designation change on my broker's website; for example, I owned KCC, and a few days ago when I visited the website, they had changed the symbol to KCC/CL.

Once you know a call has been issued, you can calculate the final proceeds, which will comprise par value ( $25, $50, or $100 ), plus accrued interest ( I use the period from last payment date to day before redemption ).

On the day of redemption, you'll see your stock disappear and the final proceeds added to your cash balance. That's it.

If you bought the stock below par, you will have a capital gain. If you bought above par, you will have a capital loss of the amount above par.

Accrued interest is reported as QDI or non-QDI, whatever the paying company declares. It is NOT a Cap Gain/loss.

As Mulligan has described, sometimes folks who don't know that a call has been announced still bid at prices far above the final proceeds; in such cases you can quickly sell to those poor uninformed types and make some extra coin.

PS: Some brokerage websites will not allow online trading for a called issue. You might have to call it in and insist on the online commission.

 

[Winemaker]

I've had several issues called over the years, but I always buy way under par. OSM, for example, I have 800 shares that I bought for under $21 a few years back. It's getting called next month for $25 and 2 interest divvies. I only wished I bought more but I usually buy only $5000 worth to limit exposure. When rates started to rise or were supposed to rise I added to the position because this was a floater.

 

[Coolius]

Be a little careful of fixed-to-floaters, especially those with an initial fixed rate period ( usually 5 years ) followed by a rate based on 3-month LIBOR + a kicker.

If the kicker is high ( I've seen some issues with LIBOR + 6% ), the issuing company might very well call it once the float period begins, if they believe that LIBOR will be increasing from then on.

 

[Mulligan]

I've had several issues called over the years, but I always buy way under par. OSM, for example, I have 800 shares that I bought for under $21 a few years back. It's getting called next month for $25 and 2 interest divvies. I only wished I bought more but I usually buy only $5000 worth to limit exposure. When rates started to rise or were supposed to rise I added to the position because this was a floater.

Your bravery was rewarded! I need more nerves to do this. This issue got to that price about a year ago. I looked but then I run across articles on how financially leveraged they are (which is true) and then throw in needless fear all student loan people would default and crush me, so I chickened out until last week to scalp 13 cents from it.

 

[Mulligan]

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

Nice find Mully!

RM, you can appreciate a little research on my CNIGO preferred from Corning Nat Gas... I researched the financials before I bought, but have turned to digging into the ownership to amuse myself.... The CEO and Gabelli Funds own over 40% of the common stock themselves. Throw in the BoD's and almost 70% of the entire float is owned by management and Gabelli. Gabelli keeps adding more over the years. They just recently surpassed the CEO in total shares. Gabelli and CEO also own a huge chunk of the convertible preferred that was issued with CNIGO also to buy the little electric and gas utility last year, so they are keeping control. CNIGO only has 105,000 and half of those are chewed up by a trust of deceased business man and a 74 year director who apparently likes income over the commons....
What the heck I bought a few hundred of the commons today and tossed them into the sock drawer. I suspect Gabelli is thinking buyout down the road as the industry is consolidating fast.

 

[Running_Man]

RM, you can appreciate a little research on my CNIGO preferred from Corning Nat Gas... I researched the financials before I bought, but have turned to digging into the ownership to amuse myself.... The CEO and Gabelli Funds own over 40% of the common stock themselves. Throw in the BoD's and almost 70% of the entire float is owned by management and Gabelli. Gabelli keeps adding more over the years. They just recently surpassed the CEO in total shares. Gabelli and CEO also own a huge chunk of the convertible preferred that was issued with CNIGO also to buy the little electric and gas utility last year, so they are keeping control. CNIGO only has 105,000 and half of those are chewed up by a trust of deceased business man and a 74 year director who apparently likes income over the commons....
What the heck I bought a few hundred of the commons today and tossed them into the sock drawer. I suspect Gabelli is thinking buyout down the road as the industry is consolidating fast.

I found the 8K of yesterday they filed when they announced the quarterly dividend of $0.16 which makes it a pretty decent dividend yield of 3.3% and about 50% payout ratio with a PE of 15 so it is very fairly priced. There is also of course the possibility that there are plans Mario knows of for Corning to become a bigger player in the utility market. I see the only insider activity on this stock being Ted Gibson a director acquiring 1700 shares in 3 buys over the last 6 months. They are audited by a small accounting firm Freed Maxick and I like that executive compensation tops out at around 200K per year.

This is a nice small utility that should be a decent investment, I would expect they are going to be able to grow that dividend at greater than inflation and this kind of a company is ripe to be taken over so there is a potential premium there on top of the very fair dividend and price merely for the company.

I may buy some………..

This article from a year ago pretty much explains Mario Gabelli’s thoughts on this industry
http://seekingalpha.com/article/3864836-natural-gas-utilities-gobble-gobble-gobble

 

[Mulligan]

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

I found the 8K of yesterday they filed when they announced the quarterly dividend of $0.16 which makes it a pretty decent dividend yield of 3.3% and about 50% payout ratio with a PE of 15 so it is very fairly priced. There is also of course the possibility that there are plans Mario knows of for Corning to become a bigger player in the utility market. I see the only insider activity on this stock being Ted Gibson a director acquiring 1700 shares in 3 buys over the last 6 months. They are audited by a small accounting firm Freed Maxick and I like that executive compensation tops out at around 200K per year.

This is a nice small utility that should be a decent investment, I would expect they are going to be able to grow that dividend at greater than inflation and this kind of a company is ripe to be taken over so there is a potential premium there on top of the very fair dividend and price merely for the company.

I may buy some………..

This article from a year ago pretty much explains Mario Gabelli’s thoughts on this industry
http://seekingalpha.com/article/3864836-natural-gas-utilities-gobble-gobble-gobble

A year ago last February, German owned 18.06% of float and Gabelli 17.85%. Latest I seen German owns 20.46% and Gabelli 20.64%. Plus Gabelli has over 30% of the convertible preferreds CNIGP while German 24% of the convertible. I noticed a little tax trick they used I didnt know was legal. Since CNIGO is a term dated perferred, the owners of the preferred get the QDI tax treatment. However CNIG gets to treat it as an interest expense on their ledgers and treat it as a "bond interest" payment to save on taxes.
The common has had a 90 day trading ave of around 400. Yet over 3,000 traded today. Wasnt me...I only bought 300 and will sit there unless it drops down the road and I may consider more. Very wide bid ask today. They were asking $21 while selling to me at $19 and $19.25.

 

[Mulligan]

RunningMan, I forgot to mention, but the PE is a little artificially distorted due to the Pike utility transaction...They clearly got a deal on this.
In 2016, our consolidated net income was approximately $3.1 million, an increase of approximately $1.3 million from 2015, mainly due to the bargain purchase adjustment for the stock acquisition of Pike of $1.2 million. This is a one-time transaction related to the acquisition of Pike in August.

I have been reading articles and am connecting the dots on what they are trying to do by acquiring the Pa utility and creating the part ownership subsidiary of Leatherstocking which pipes the gas out of shale country.
As other parts of the nation protest a pipe being built... CNIG is going opposite way stirring the restless natives to protest why the pipeline HASNT been built yet. Accretive bolt ons to service unserviced populations will really boost returns on a company servicing only 15,000 now.
http://naturalgasnow.org/crouch-cuomo-needs-snap-pair-approve-constitution-pipeline/