Loading...

In the convertible security space, there are basically two types of products: Convertible bonds and convertible preferred stocks.  (There are some hybrid instruments in which a convertible bond is purchased by a trust that then issues preferred stock against the bond, but that is a less common arrangement.)  The two basic offerings differ in that a bond is a debt instrument, while the preferred stock is a form of equity.  Both have the conversion feature and both tend to have higher yields than the common stocks of the issuing companies.  Most convertible preferred stocks, however, trade at lower price points (often $25 or $50 per share) than convertible bonds (which are priced in increments of $1,000, when trading at par) making preferreds more accessible to individual investors. 

Much like a convertible bond, the value of a convertible preferred stock will depend on the price of the underlying common stock when that stock is trading above the conversion price stipulated by the preferred stock’s prospectus.  If the price of the stock is below the conversion price, the value of the preferred will reflect its “floor” investment value. That said, convertible preferred stocks will often trade on their investment value if the issuing company’s finances are suspect.  In addition, preferred stock holders also benefit from having a higher claim on assets of the issuing company than straight equity, which is the last in line during a corporate liquidation. However, it is important to note that preferred owners have a lower claim than bond holders.

In this screen, we reviewed our database for convertible preferred stocks with the widest yield spread between the convertible preferred and the underlying common stock.  Many of these preferred stocks are trading below their liquidation value, which results in large yields relative to their underlying common stocks.  Below is a partial list of the convertible preferred stocks that our screen turned up.  This list is an interesting starting point, and it has some high-yielding alternatives to common stocks. Furthermore, they offer better downside protection because of the prospectus covenants of the preferred structure.

 

 

Convertible Preferred

Common Stock

 

Convertible Securities

Symbol

Rec Price

Curr Yld(%)

Price

Yield(%)

Industry

Emmis Communications $3.125 A  

EMMSP 

$22.75

13.7

$2.25

0.0

Entertainment

Affiliated Cap Tr $2.575 (144A)

AMAPL 

$23.25

11.1

$69.75

0.0

Financial Services

PetroQuest Energy $3.4375 B    

PTQEP 

$31.45

10.9

$8.33

0.0

Oilfield Services

Lucent Tech Cap $77.50         

LUTHP 

$720.00

10.8

$2.84

0.0

Telecom Equipment

MF Global Ltd $9.75 (144A)     

MFGLL

$89.88

10.8

$6.58

0.0

Financial Services

United Rentals $3.25           

URIRP 

$31.00

10.5

$12.48

0.0

Industrial Services

Continental Air $3.00          

CIRFP 

$31.25

9.6

$24.77

0.0

Air Transportation

FelCor Lodging Tr. $1.95 A     

FCHPrA

$20.22

9.6

$5.47

0.0

REIT

Beazer Homes $1.8125 (Mand.)   

BZU

$19.42

9.3

$4.05

0.0

Home Building

Cincinnati Bell(Brdwng) $3.375 

CBBprB

$38.25

8.8

$3.54

0.0

Telecom Services

Doral Financial $11.875        

DORLL 

$139.13

8.5

$15.00

0.0

Financial Services

Selected Convertible Profiles:

United Rentals North America (URI), an equipment rental company, operates in 68 locations in 16 U. states and across Canada, renting an array of equipment to a diverse customer base that includes construction industry participants, industrial companies, homeowners, and other individuals. The company also engages in related activities, such as selling used rental equipment, acting as a distributor for certain new equipment, and selling related merchandise and parts. The types of rental equipment offered by the company include a range of light to heavy construction industrial equipment (such as pumps, generators, forklifts, backhoes, cranes, bulldozers, aerial lifts, and compressors), general tools and equipment (such as hand tools, and garden and landscaping equipment), and special event equipment (such as tents, tables, and chairs). The United Rentals 6.5% ($3.25) convertible preferred stock (liquidation value, $50.00) is ranked for above-average performance over the next six to 12 months. It yields 10.5%, and is callable at $50.00 a share. However, at a price of $31.00 per share, a redemption call is unlikely because such action would cause the company to spend unnecessary cash.


Cincinnati Bell (CBB) is a national provider of data and voice communications services and a regional provider of wireless communications services. It operates three segments: Wireline (57% of 2009 revenues), Wireless (22%), and Technology Solutions (21%). The company employs about 3,200 and is headquartered in Ohio. Tel.: 513-397-9900. Internet: www.cincinnatibell.com. The Cincinnati Bell 6.75% trades in the high $30s; liquidation value is $50.00. As a “busted” convertible the 9% yield is makes it an attractive addition to yield-orient portfolios. The 20% premium over investment value adds support to its price, thus providing good downside coverage should the stock falter.