PREFERRED
STOCK NEWS
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,
allstateinvestors.com)
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,
www.PreferredStockInvesting.com)
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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