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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 Cal Dive (DVR), Dominion Resources (D), and Apollo Investment (AINV), 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
Rec Pr Curr Yld(%) Y-to-M(%) Prem(%) Cm Pr Cm Yd Cm Tkr
Fifth St. Fin 5.375s2016 (144A)  106.48 5 2.1 67 $9.44 13.5 FSC 
Cal Dive Int'l 5s2017 (144A)  99.42 5 5.3 29 $1.73 NIL DVR 
Dominion Resources $3.00 B  $57.95 5.2 PFD 8 $70.06 3.2 D 
Ares Capital 5.75s2016 (144A)  108.56 5.3 1.1 19 $17.43 8.7 ARCC 
Blackrock Kelso 5.5s2018 (144A)  104.25 5.3 4.3 31 $9.22 11.3 BKCC 
Apollo Commercial RE 5.5s2019  102.84 5.3 4.9 9 $16.98 9.4 ARI 
Apollo Investment 5.75s2016  106.61 5.4 2 78 $8.24 9.7 AINV 
Dominion Resources $3.1875 A  $57.83 5.5 PFD 8 $70.06 3.2 D 
Chesapeake Energy $57.50 *  $975.00 5.9 PFD 10 $24.67 1.4 CHK 
Wells Fargo(Wachovia) $75.00 L  $1,175.00 6.4 PFD 275 $49.12 1 WFC 
Apache Corp $3.00 D  $45.70 6.6 PFD 24 $80.71 0.7 APA 
*Prices as of 3/21/14
 
 
             
               

Cal Dive International provides manned diving, pipelay and pipe burial, platform installation, and platform salvage services to the offshore oil and natural gas industry. Its principal business involves providing essential marine contracting services on the Gulf of Mexico in support of the offshore oil and natural gas infrastructure throughout the production lifecycle, including services on production platforms, risers, and subsea production systems. Its customers include major and independent oil and natural gas producers, pipeline transmission companies, and offshore engineering and construction firms. It owns a diversified fleet of 28 vessels, of which 19 are surface and saturation dive support vessels, and nine are construction barges. Its fleet of dive support vessels consists of 12 vessels capable of working in water depths up to 300 feet, and seven saturation dive support vessels that typically work in water depths of 200 to 1,000 feet.

The convertible, which is trading just under par, offers a 5.1% current yield, while the underlying common is dividendless, and a 5.9% to maturity. It is poised to share in as much as 42% of any gains in the stock, with solid downside protection. 

Dominion Resources is a holding company for Virginia Power & North Carolina Power, which serve 2.5 million customers in Virginia & northeastern North Carolina. The company’s nonutility operations include independent power production and retail energy services. 

The Dominion Resources Series B convertible preferred is trading in the money and convertibles into 0.766 shares of common share. It offers a 2.0% current yield advantage over the stock, and is favorably leveraged to share in the activity of the common.

Apollo Investment Corporation is a specialty finance company that 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 2.0% yield to maturity. Its equity participation is limited, as with busted convertibles, and its low 7% premium over investment value supports bond value, but heightens the bond’s sensitivity to changes in interest rates.


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