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 higher quality companies are more assured of dividends and interest payments. This makes sense, as financially strapped companies would likely have more difficulty making payments to bond holders and shareholders than a company with an iron clad balance sheet.

That said, convertible notes and convertible preferreds issued by high investment-grade companies are generally viewed as less likely to default on their obligations and, thus, are often expected to offer 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 Callaway Golf (ELY), Universal Corporation (UVV), and Health Care REIT (HCN), all have high yielding convertible bonds and/or preferred stocks (a brief overview of each is below the table). So, investors need not give up quality to get a higher yield in all cases. Still, investors need to be picky. 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.

  

Convertible Securities

Price

Yld(%)

YTM

Prem (%)

Cm Prx

Cm Yld

Cm Tkr

Huntington Bancshares $85.00 A 

$1,299.09

6.5

 PFD

107

$7.50

0.5

HBAN

Callaway Golf $7.50 B          

$125.50

6.0

 PFD

31

$6.73

0.6

ELY 

Wells Fargo(Wachovia) $75.00 L 

$1,292.37

5.8

 PFD

448

$36.97

1.3

WFC 

Fifth Third Bancorp $8.50 G    

$145.44

5.8

 PFD

3

$16.37

0.2

FITB

Peabody Energy 4.75s2041       

83.98

5.7

6.0

126

$21.67

1.6

BTU 

Blackrock Kelso 5.5s2018 (144A)

100.66

5.5

5.5

11

$10.54

9.9

BKCC

Apollo Investment 5.75s2016    

106.35

5.4

3.4

65

$8.84

12.7

AINV

Ares Capital 5.75s2016 (144A)  

108.09

5.3

2.8

13

$18.24

8.3

ARCC

Health Care REIT $3.25 Series I

$61.08

5.3

 PFD

11

$65.23

4.2

HCN 

Universal Corp $67.50          

$1,274.11

5.3

 PFD

1

$58.01

3.2

UVV 

*Prices as of 3/14/13

  

Highlighted Convertibles:

Universal Corporation formerly Universal Leaf Tobacco, is the largest leaf tobacco exporter/importer in the world. It conducts business in more than 35 countries and employs more than 25,000 permanent and seasonal workers. The company engages in the purchasing, processing, and selling of tobacco to cigarette, pipe tobacco, and cigar manufacturers.

The convertible preferred offers a 2.1% current yield advantage over the stock. It is very favorably leveraged, with a 1% premium over conversion value. At that level, the value of the note is expected to keep pace with any increase in the common, but fall only about half as much if the common should decline.

While common shareholders are rewarded annually through dividend increases, preferred dividends are secured since they are paid before common dividends. So, should the company come up for dissolution, preferred holders will benefit before common shareholders are considered.

Health Care REIT is a Real Estate Investment Trust (REIT) focusing on a wide assortment of senior housing and healthcare real estate, including senior housing communities, skilled nursing facilities, medical office buildings, inpatient and outpatient medical centers, and life sciences facilities. In addition, Health Care REIT offers various property management and development services. As of 2012, Health Care REIT's portfolio was comprised of roughly 937 properties, located in 46 states.

As the Housing industry appears to be heading northward, HCN finished 2012 on a strong note. For the fourth quarter, total sales of $500.7 million were 23% higher than the previous fourth quarter, and share earnings rose 84% to $0.35 a share. For the full year, total sales of $1.864 billion and share net of $0.77 were up 31% and 28%, respectively, from 2011’s final figures.

The company’s convertible preferred share, which is trading in the money, offer a 5.3% current yield, and The company earned $0.35

Apollo Investment Corporation (AINV) is a specialty finance company. It invests primarily in middle-market companies with annual revenues of $50 million to $2 billion. Investments are in the form of mezzanine and senior secured loans. The company makes direct equity investments, as well.

The convertible bond matures on January 1, 2016. Currently, it offers a 5.4% current yield and a 3.4% yield to maturity. Common dividends were lowered from $0.28 a share to $0.20 for a yield of about 9.6%. But more cuts could materialize in the future as the company struggle through a slowly rebounding U.S. economy. 

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