Financial Preferred Shares Still Got Game

By Aryeh Katz | September 11, 2009 AAA

Over the last few quarters, as credit markets found their feet and normalcy returned to the stock market, one of the greatest beneficiaries was preferred shares. Predominantly issued by banks and other financial firms, preferred shares experienced a tremendous revolution in confidence in the last twelve months. After getting a historically unprecedented wallop both last fall in the wake of the Lehman Bros. bankruptcy and again this spring, during a second round of selling in March, this asset class rose meteorically over the last six months to better than pre-crash levels. The turnabout is as good a measure as any of investor confidence in the financial system. (For an overview of preferred shares, see A Primer On Preferred Stocks.)

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Below we highlight several issues that have been particularly successful of late, and which still have much to offer income-oriented investors who require a modicum of security in their portfolios.

The Best of the Financials
J.P. Morgan (NYSE:JPM) didn't escape the carnage of last autumn's market sell-off, but it is recognized nonetheless as a leader in the financial industry. In fact, it would not be imprudent to say that J.P. Morgan has, indeed, been among the best performing of all the large cap financials, and that it still holds a place of pride among investors as the safest place to park money in the sector.

Although J.P. Morgan currently offers a number of preferred shares, but we highlight here the 8.625% 'J' series issue (NYSE:JPM-I) which currently offers 8.08% and has seen an impressive post-crash rise of 90%. Moody's rating agency deems the 'J' issue preferred stocks A2, while S&P gives them a BBB+ rating.

J.P. Morgan has a current market cap of over $168 billion.

Real Estate Turnaround
Though 2008's crisis was brought about in large part by sub-prime loans to home buyers and developers, the real estate market appears to be turning a corner, and the real estate preferreds began discounting that eventuality some months ago. One stock that's worthy of mention is Kimco Realty Corp.'s 7.75% 'G' series preferred (NYSE:KIM-G), now trading with an 8.49% yield after running up more than 120% since lows set in March of this year.

Kimco Realty (NYSE:KIM) has a market capitalization in excess of $4.6 billion and is in the business of buying, developing and managing neighborhood and community shopping centers. They currently have an interest in 1,950 properties in both North and South America.

Moody's and S&P rate the Kimco preferreds Baa2 and BBB-, respectively.

Insurance Leader
Prudential Financial Inc.'s 9.00% Junior Subordinated Notes (NYSE:PHR) currently yield 8.96% annually and have run up from $7.25 to $25.10 in the last two quarters, a gain of 246%.

Prudential (NYSE:PRU) is a global insurance and investment management operation with a market cap of almost $22.5 billion. The preferred shares are rated Baa3 and BBB+ by Moody's and S&P respectively.

The Wrap
Preferred shares - particularly those in the financial field - got whacked when the U.S. government intervened in credit markets last fall, and again this winter. But the rebound in prices has been phenomenal, and the three issues discussed above show there's still much to be said for financial preferreds at current levels. (Learn about a version of preferred shares called the convertible preferred in our article Introduction To Convertible Preferred Shares.)

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