Gaming Preferreds That Never Mature

It’s easy to get sucked into buying pfds on the basis of a fat YTC. But how to manage their risks if the call doesn’t happen, as might not if the pfd never matures (or is so long-dated that you’ll be long dead)?

Like many publicly-traded companies, WFC has a common stock, has issued bonds, has pfds and even a convert. The common offers a 5.95% div. The 69 bonds have YTMs ranging from 0.2% to 5.2%. The 7 pfds have CYs ranging from 5.7% to 6.5%. The convert is trading at a minimalist, 1.8% discount to its conversion value. (So let’s exclude it from further consideration.)

The website I depend on for fundamentalist analysis sums its opinion of WFC with this phrase “flawless balance sheet”. But the agencies rate the company’s debt as A1/BBB+, which is worrisome. Why the 3 notch diff? That’s one research problem that should be looked into. The pfds are rated Baa2/BB+, which is a pretty aggressive down-notching, more than is explained by pfds being junior in the credit line. (Hence, another research problem.) But let’s make the likely warranted assumption that if the SHTF, WFC will be included in the Fed’s bail-out of the banks. Hence, the company will likely survive the coming crash, and investors will likely be able to sell whatever of WFC’s stock, bonds, or pdfs they own. What the price will be becomes an investors’ worry and concern.

“What’s fair value for the common?”

Using what it calls an ‘Excess Returns Model’, Simply Wall Street estimates ‘fair value’ for WFC to be $89.21. That’s a roughly (-50% discount to where the stock closed today, 06/09/22. By way of comparison, SWS suggests the discounts to fair value for BAC, C, KEY, and JPM are (-48%), (-25%), (-62%) and (-33%), resp. If you pull a price chart for an ETF that tracks the banksters, you’ll see the same pattern of those stocks trading lower than formerly for the obvious reason of how financials become priced when the Fed threatens to raise interest rates (though it hasn’t the will or means to actually do so in any meaningful way). So that becomes a third research problem. The Fed is bluffing. Were that not the case, then the Fed’s interest-rate target would be a couple hundred basis points ABOVE their phony CPI rate of 8% something. (That’s what Burns did. That’s what Volker had to do. But Yellen is both an idiot and a coward.)

So the investing/trading game is this. We all know the asset bubble is going to pop. We all know that now is the time to be creating shopping lists. Do WFC’s bonds, pfds, or common merit a place on that list? My instincts say “Yes”. So the next question becomes, “How Much?” And that’s the tough one. At some price, some of nearly anything and everything has to be bought if one’s intentions are to gain exposure to pricing opportunities, but not so much that mistakes and misjudgments get you thrown out of the game. So that becomes a fourth research problem, creating an investing/trading plan --with respect to buying pfds or not-- that is consistent with one’s means, needs, interests, and goals.

Frankly, I like preferreds a lot. Though they don’t offer the high returns of spec-grade debt, they are far easier to vet and to get in and out of, and their typical 1/40th size of bond makes them easy to nibble on.