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MAY 2015

Issue 98


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by Doug K. Le Du


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Top 10 Investment Grade, Cumulative Preferreds Available Under $25



The ten highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 6.4 percent Yield-To-Call in today's preferred stock marketplace.

As rates move up and down over time, prices tend to move in the opposite direction, moving down and up, respectively. This is why preferred stock investing is long-term investing, taking advantage of the known inverse relationship between rates and prices over time.

The search engine parameters seen in Figure 1 look for preferred stocks and exchange-traded debt securities (ETDs) that are currently trading below their $25 par value, have cumulative dividends (meaning that if the issuing company skips a dividend payment to you, they still owe you the money) and offer investment grade ratings from Moody's Investors Service.

Currently priced below par

Purchasing shares below $25 is an important consideration for many preferred stock investors. In the event that your shares are redeemed (bought back from you) by the issuing company, shareholders will receive the security's par value in cash in exchange for their shares. By purchasing shares below their par value ($25 in most cases and in all of the cases shown here), preferred stock investors are able to add a layer of principal protection to their investment while also positioning themselves for a downstream capital gain in the event of a future call.


Figure 1 shows the complete filter used to find these gems. Of the twenty parameters that can be set, the four arrows highlight the keys for this search. Setting the "Currently priced below par" parameter to "Yes" does the magic here.



In addition to finding the highest quality issues that offer cumulative dividends and are currently trading below their $25 par value, this filter also limits the list to issues that have not suspended their dividend payments. And by setting "Today's price, at least" to $0.01 and "Today's volume, at least" to 1 share the filter will exclude less liquid issues (securities that have not traded today).

This is just one example. Click on the filter image to see another one along with a more detailed explanation.


Figure 2 shows the results when this search is applied to our Preferred Stock List
TM database (please note that to protect the values of subscriptions to our CDx3 Notification Service, trading symbols are obscured here). Already a CDx3 Notification Service subscriber? See page 6 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, that you received at the end of last month for symbols.



There were a total of 897 preferred stocks and ETDs trading on U.S. stock exchanges as last month came to a close. Of these 897, these are the top ten highest quality issues that are trading below their $25 par value. This list is sorted by dividend rate (coupon) with the highest payers listed first.

The securities shown in green font are ETDs (ETDs are bonds that trade on the stock exchange rather than the bond market and are very similar to preferred socks) while the remaining securities listed are preferred stocks. All have a current market price (seen in the Last Price column) that is below their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's.

Keep an eye out for sub-$25 buying opportunities such as those listed here. The lower your purchase price, the more principal protection you'll have. The preferred stocks and ETDs listed in Figure 2 are offering some of the best choices available to you as an income investor.

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Allstate Insurance Corporation Preferred Stocks -

Opportunities and Risks


Allstate Insurance Corporation (NYSE: ALL) has a $28.5 billion market capitalization and offers five traditional preferred stocks and one Exchange-Traded Debt security for the consideration of preferred stock investors.

ETDs are very similar to preferred stocks and are often labeled as such on brokerage statements. But ETDs are recorded on the company's books as debt, rather than equity, and are actually bonds that trade on the stock exchange (rather than the bond market). As debt, ETDs are often considered to represent lower investment risk than the same company's preferred stocks.

Allstate’s ETD carries a Baa1 Moody’s rating (two notches into investment grade territory) while the company’s five traditional preferred stocks are rated Baa3 (bottom of the investment grade scale).

Market strategy and performance

Allstate delineates their market along two customer-focused characteristics, creating four distinct market segments – (1) the preference for full-service versus self-service and (2) those that prefer a specific brand versus those who are less brand-sensitive.


This strategy, while comprehensive, presents challenges as the company continues to adjust their approach to finding the balance between policy growth and profitability.

While the full-service Allstate brand accounts for 90 percent of the property liability premiums collected by the company, management clearly recognizes the need to expand into the self-service area, acquiring online insurer Esurance in late-2011.

But here is the dilemma: Policy growth is being primarily realized by the self-service (internet) segments, with Esurance reporting a 2014 policy in force (PIF) growth of 12.6 percent over 2013. But this same segment realized a 2014 recorded combined ratio of 117.7 (the combined ratio is the amount paid out in policy expenses divided by the amount collected in premiums, a value exceeding 100 indicating a loss).

Conversely, the full-service Allstate brand segment reported a solid 91.5 combined ratio (profitable policies) for 2014, but an essentially stagnant 2.1 percent policy growth.



In other words, during 2014, Allstate’s four-segment business model saw policy growth in the unprofitable self-service segment and stagnant growth in the profitable full-service segment.

It’s hard to tell from company filings and investor information if the self-service segment growth is coming at the expense of branded, full-service products. To the extent that this is the case, the company is effectively converting full-service profitable customers into its self-service unprofitable segment.


Cash deployment

But because the profitable Allstate brand still makes up the bulk of the company’s business, excess cash continues to pile up. As we have seen with a multitude of U.S. companies lately, Allstate has implemented an aggressive repurchase program of its common shares.

During their February 5, 2015 conference call with analysts, CFO Steven Shebik summarized the company’s cash return to shareholders by saying “Shareholders received cash returns of $368 million in the fourth quarter as we repurchased 251 million of common shares…and paid $117 million in common stock dividends. Total common shareholder cash returns for the year were $2.78 billion and included quarterly dividends to $750 million…As of December 31, 2014, $336 million remained under the company's $2.5 billion share repurchase program authorized last February. We expect to finish this program in the first quarter of this year.

And returning excess cash to shareholders is going to continue throughout 2015 and into 2016 as well. Shebik described the 2015 program, stating “Yesterday, the board continued its practice of returning excess capital to shareholders by increasing the dividend and approving a new share repurchase program. The common dividend was raised 7% to $0.30 per common share for the first quarter of 2015. In addition, a $3 billion share repurchase program was approved for execution through July 2016.

Since preferred shareholders are always paid their dividends prior to common shareholders, these cash deployment plans provide a strong measure of assurance to those holding the company’s preferred shares.


(Source: Allstate Q4 2014 Investor Presentation,


Allstate preferred stock

Allstate issued its $500 million ETD (ALL-B) and five preferred stocks within an eighteen month period, beginning in January 2013 through June 2014, raising a total of about $2.2 billion. Interestingly, this is the same period that the company implemented its 2014 common share repurchase program, spending the same amount - $2.2 billion - throughout the year. This program essentially converted voting shares of common equity into non-voting shares of preferred equity and $500 million in new debt.


The return to shareholders, as measured by Yield-To-Call, being generated by each of these six income securities is more than double that being offered by the 1.7 percent current yield of the company’s common shares (the YTC calculation accounts for the capital loss today’s preferred stock buyers will realize in the event of redemption on these securities’ respective call dates).

While there are some weaknesses to these securities, they do represent stable, long-term income and a diversification opportunity for preferred stock investors looking to extend their portfolio into the insurance segment.

All six of Allstate’s income securities use the calendar quarter as their dividend cycle. The June dividend for ALL-B, the ETD, has already been declared.

(Sources: SEC prospectuses: ALL-A, ALL-B, ALL-C, ALL-D, ALL-E, ALL-F; preferred stock data: CDx3 Notification Service database,

What’s next?

With the exception of their coupon rates, Allstate’s five preferred stocks (ALL-A, -C, -D, -E and -F) are very similar in their prospectus provisions. All offer five-year call protection (from IPO), investment grade ratings, $25 par values and pay quarterly dividends on the same schedule. And these five preferreds are designated as offering Qualified Dividend Income (see “Tax-Advantaged Preferred Stocks: Does It Really Matter?”).

But the stability and diversification benefits that these securities offer must be considered in light of their primary weaknesses. Allstate’s five preferred stocks have non-cumulative dividends and are offering an average below-market current yield of 5.9 percent. The 27 highest quality, call-protected preferred stocks with cumulative dividends trading on U.S. stock exchanges are currently offering an average 6.6 percent current yield.

Also, none of the five preferred stocks have a maturity date so the company is not required to call the shares. And the low coupon rates offered by ALL-A (5.625%) and ALL-F (6.250%) make these two issues unlikely to ever be redeemed (see “Is Your Preferred Stock About To Be Called?”).

Further, ALL-B, the ETD, has a fixed-to-floating rate structure, with the variable rate kicking in on this security’s January 15, 2023 call date. Historically, the variable rate structure has rarely benefited preferred stock investors since, once the call date arrives, the shares are usually called if rates have increased (see “Variable-Rate Preferred Stocks Underperform Their Fixed-Rate Cousins”).

But even in the face of a changing marketplace, where its primary product is highly commoditized with shrinking brand loyalty and its method of delivery is changing from highly profitable full-service to marginally profitable (or, as yet, unprofitable) self-service, the risk of default is extremely low.

The primary attraction to Allstate’s income securities is therefore the stability of the income they can provide over a long period of time and the diversification opportunity they may represent for your income portfolio.










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Preferred Stock Investing, Fifth Edition

Learn how to screen, buy and sell the highest quality preferred stocks


Preferred Stock Investing is one of the highest reader-rated books in the United States with 80 reviews posted at Amazon.

A new edition of Preferred Stock Investing is published every other year in order to keep up with current market trends and research. The Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are expected to face.

See: Reviews | Table of Contents | Free Excerpt | Paperback | eBook

The Fifth Edition has 21 chapters organized into six Parts over 334 pages. Here are some highlights:

- Part I, "The Preferred Stock Market," introduces a new suite of charts and metrics specifically designed to measure and track the preferred stock marketplace.

- Part III, "Buying the Highest Quality Preferred Stocks," includes several new chapters such as "Buying 'Fed-Free' Preferred Stocks," "Keeping Up with Increasing Interest Rates" and "Buying Less-Than-Perfect Preferred Stocks."

- And chapter 8, "Managing the Risks," has been completely rewritten and expanded to include risks that are unique to preferred stocks during the increasing rate environment that awaits us.

You can pick up a copy of the new Fifth Edition of Preferred Stock Investing at your favorite online retailer such as Amazon (paperback) or directly from BookLocker, the book's publisher (BookLocker provides paperback and PDF eBook formats).













Recent Preferred Stock Articles by Doug K. Le Du


Here is a list of some of my recent syndicated articles. To view an article, just click on the headline.

























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The content of this newsletter, and the materials that it links to that are owned by Del Mar Research, LLC, are to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be presented herein. Consider your financial resources and goals before investing. You, and not Del Mar Research, LLC, are solely responsible for your own investing decisions.