Citizens Financial Group, Inc. (CFG-PE) | Daily Alert March 10
For stock investors, the late-February correction provided an education in the role of information in financial markets. The downturn was worsened by doubts about the credibility of information emanating from China, the coronavirus’ site of origin. Misinformation from non-experts on the pathology of communicable diseases further rattled stock investors. It required considerable effort to cut through the noise and assess plausible arguments that the decline was overdone, advanced by genuine authorities on human health and financial markets.
What about income investors? On the face of it, their opportunities diminished. The headlines focused on plummeting interest rates, as capital fled to the safety of U.S. government bonds. Yields on both 10-year and 30-year Treasuries reached all-time lows. What the headlines did not communicate was a huge increase in risk premiums, that is, the extra yield investors receive for holding corporate obligations rather than default-risk-free government bonds.
For instance, between February 11 and February 28 the yield-to-worst differential between the median issue in the ICE BofA High Yield Fixed Rate Preferred Securities Index and the ICE BofA US Treasury Index more than doubled from +179 basis points to +404 basis points. (1 basis point = 1/100 percentage point.)
So even as yields on top-quality bonds plummeted, the median below-investment-grade (BIG) preferred’s yield-to-worst rose from 2.59% to 5.20%. Yield-to-worst takes into account the risk that the issuer will call your preferred, putting cash back into your hands that you will likely have to reinvest at a lower dividend rate. The huge jump in this yield measure during February reflected a substantial decline in call risk, thanks to the price drops. On February 11 just 8% of the issues in the high-yield preferred index were priced at par ($25 in most cases) or lower. On February 28 the proportion was 34%.
The newly created opportunity to put money to work at attractive rates is important to remember even while the sting of short-term losses remains fresh. Yes, the value of $1.00 invested in the high yield preferred index on December 31, 2012, with dividends reinvested, dropped from $1.87 to $1.78 in the last 17 days of February. But in percentage terms, that was slightly smaller than the drop from $1.60 to $1.52 during 2018. One year after that decline, the accumulated value had rebounded and risen to $1.82.
It’s an excellent bet that last month’s drop, too, will eventually represent just a minor dip on a long-term chart of BIG preferreds’ accumulated value. Withstanding ups and downs in income markets is the price of obtaining higher yields than CDs provide. And even investors who spend rather than reinvest their distributions benefit from putting more money to work at substantially higher rates than income investments offered a few weeks ago.
We are recommending Citizens Financial Group, Inc.; 5.00% Fixed Rate, Series E Non-Cumulative Perpetual; Par $25.00; Annual Cash Dividend $1.25; Current Indicted Yield 5.08%; Call Date 01/06/25 at $25.00; Yield to Call 5.36%; Pay Cycle 1b; Exchange NYSE; Ratings, Moody’s NR, S&P BB+; CUSIP 174610402.
CFG is one of the nation’s oldest and largest financial institutions. With approximately $163 billion in total assets at 06/30/19, the banking company ranks among the 25 largest U.S. banking institutions.
CFG operates throughout New England and in New York, New Jersey, Pennsylvania, Delaware, Ohio, Michigan, and South Carolina. The company offers a broad range of retail and commercial banking products and services to consumers, middle-market companies, and large corporations.
CFG’s 5.00% preferred issue may be redeemed beginning 01/06/25 and on any dividend payment date thereafter.
The banking company reported Q419 adjusted net income of $454.0 million or $0.99 per share, on the strength of higher mortgage banking fees. Results were ahead of analysts’ $0.96 estimates. Higher revenue growth benefited from strong mortgage banking income and higher credit card fees. CFG’s credit quality and capital position remain sound.
This preferred investment is suitable for low- to medium-risk taxable portfolios, recognizing CFG’s investment grade senior debt ratings. Buy up to $26.20 for a 4.77% current yield and
a 3.92% yield to call.
Martin Fridson, CFA, Income Securities Investor, www.isinewsletter.com, 800-472-2680, March 2020
RLJ Lodging Trust (RLJ-PA) | Daily Alert February 24
RLJ Lodging Trust (RLJ-PA) $1.95 Series A Cumulative Convertible Preferred Shares is often quoted as RLJ.PA, but on the iPhone it is RLJ’A, and Fidelity uses RLJPRA. In any case, this is the only RLJ preferred stock.
Normally, preferred stocks have a call provision whereby the company can buy them back at a certain price (par value) at a certain date (call date). However, this preferred does not have this provision which means this stock has unusual upside potential.
The only way the company could redeem this preferred stock is if RLJ common rose to $115.82 per share, an enormous rise in RLJ from its current price, which we are not forecasting any time in the foreseeable future. Instead, the upside potential comes from a drop in the yield on this preferred, which is highly likely.
This preferred stock pays $1.95 annually per share (which must be paid before the common stock dividend) providing a yield of more than 6%. If the yield drops to, say 5%, which would still be a good value, the price of this preferred would rise substantially because there is no call provision. At a 5% yield, the price of this stock would be $39 per share, a 34% increase. Meanwhile, the yield is excellent. It is also quite secure.
Gray Cardiff, Sound Advice, soundadvice-newsletter.com, 800-825-7007, February 3, 2020