Loading...

Generally speaking, companies with solid financial positions make safer investments than those with weak balance sheets. Although this may seem obvious, it follows that investors in high-quality companies are more assured of dividends and interest payments. This makes sense, as financially strapped interests would likely have greater difficulty making payments to bond holders and shareowners than a company with an iron clad balance sheet.

That said, convertible notes and convertible preferreds issued by companies of high investment-grade are generally viewed as less likely to default on their obligations and, thus, are often expected to have lower coupons and small yields when compared to weaker companies. Again, on the surface, this makes a great deal of sense, since the higher coupon would compensate for the added risk that comes with the potential for not being paid.

This quality/yield dynamic, however, isn’t always the case. Indeed, there are some high quality companies, such as American Equity Investment (AEL), Bunge Limited (BG), and National Healthcare (NHC), all have high yielding convertible bonds and/or preferred stocks (a brief overview of each is shown below on the table). So, investors don’t necessarily have to sacrifice quality to get a higher yield. Still, investors need to be savvy.

Below is a short list of high investment grade convertible securities in our universe that defy the common logic by offering a high yield as a starting point for further research.

 

Cv

Recent

Cv Yld

Y-t-M

I.V.

 

 

Com

Convertible Securities

Symbol

Price*

(%)

(%)

Gde

Industry

Price*

Ticker

Affil'd Managers $2.55         

AMGZO 

$42.10

6.1

 PFD

E

FinSvc

$78.53

AMG 

National Healthcare $0.08 A    

NHC A 

$13.70

5.8

 PFD

E

Med Sv

$32.35

NHC 

Interpublic Group $52.50 B     

INPGP 

$953.34

5.5

 PFD

E

Advert

$7.24

IPG 

Bunge Limited $4.875           

BGEPF 

$92.50

5.3

 PFD

E

FdProc

$56.10

BG  

MF Global Ltd $9.75 (144A)     

MFGLL 

$200.88

4.9

 PFD

D

FinlSv

$4.34

MF  

Fifth St. Fin 5.375s2016 (144A)

      

88.86

6.0

8.5

E

InInCo

$9.23

FSC 

Ares Capital 5.75s2016 (144A)  

      

95.00

6.1

7.2

D

Invest

$13.31

ARCC

BGC Partners 4.5s2016 (144A)   

      

91.85

4.9

6.6

D

Broker

$6.17

BGCP

Alaska Commun 6.25s2018 (144A) 

      

100.47

6.2

6.3

E

TelSrv

$7.15

ALSK

Amer Equity Investment 5.25s24 

      

100.00

5.3

5.4

E

Ins Dv

$8.32

AEL 

*Prices as of 9/22/11

Highlighted Convertibles:

Founded in 1971, National HealthCare Corporation perates long-term healthcare centers, as well as assisted and independent living centers, primarily in the southeastern United States. The company also operates specialized care departments within its healthcare facilities. These include Alzheimer's disease care units, sub-acute nursing units, and in-house pharmacies. Approximately 7% of 2010 revenues came from the following: insurance, management, and accounting service for certain long-term health care centers; rental income from owned health care real estate properties leased to third-party operators.

The company reported revenues of $190.8 million in the recent report compared to $175.5 million for the second quarter of 2010. That brought the six-month total to $383.7 million, a 10% increase over the comparative period a year earlier. Share earnings rose 18.5% in the second quarter to $0.83 from $0.70 a year ago. The six-month share earnings totaled $1.98, up 52% from last year.

The preferred, which is trading at a “busted” conversion premium level, offers a 5.8% current yield, and solid downside coverage. It is not callable before November 1, 2015 (at $15.75 per share for a yield-to-call of about 7%). However, should the common price rally to $65.07 a share between November 1, 2012 and October 31, 2015, the company would have the right to force conversion into common shares at a rate of 0.242 share per preferred.

Bunge Limited is a global agribusiness, fertilizer and food products company operating primarily in North and South America, with worldwide distribution capabilities. Bunge, is the largest processor of soybeans in the Americas and the world's biggest volume exporter of soybean products. It also boasts the title of the world's leading oilseed processor and seller of bottled vegetable oil.

As the world’s population grows, demand for food should rise. And Bunge is well positioned to capitalize on the trend. However, the possibility of adverse weather conditions on crop yields, as well as pricing competition must be taken into consideration. Sales totaled $26.7 billion in the first half of the year. That was 25% more than that sold in the same period last year. Per share net reached $3.27 for the period, up from a deficit of $0.31.

The preferred share offers a wide current yield advantage over the common (5.3% versus 1.6%). It is also favorably leveraged to participate in the activities of the common. That is, it should rise more than it falls on equal up/down percentage moves in the common.

American Equity Investment Life Holding Company engages in the development, marketing, issuance, and administration of annuities and life insurance in the United States. The company is a full-service underwriter of an array of annuity and insurance products through its two life insurance subsidiaries, American Equity Investment Life Insurance Company (American Equity Life) and American Equity Investment Life Insurance Company of New York. The company's business consists primarily of the sale of index and fixed-rate annuities. The segment earns predictable returns through effective management of spreads and investment risk. The company is currently licensed to sell its products in 50 states and the District of Columbia through a brokerage distribution network of approximately 70 national marketing organizations.

AEL saw 5% increase in net premiums earned in the first six month of the current fiscal year. Per share net, however, rose 361% to $0.76 from $0.21 earned a year earlier.

In addition to its high yield, the convertible preferred stock offers less volatility and solid downside protection. Its current yield is 4.0% higher than the dividend yield from the common. Its yield to maturity is 5.4% and a yield to put on December 15, 2011 of 5.7%.


At the time of this article's writing, the author did not have positions in any of the companies mentioned.