A Tempting Preferred Pick
I've always had a thing for cold beer and convertible preferred stocks. I came across an interesting one, stock not the beer...yet, this afternoon.
It's an issue by the insurance company Hartford (HIG). Hartford is touting itself as more of a full financial services solution than a pure insurance company nowadays. Hartford's A-Series convertible preferred shares (HIG-PA, the symbol varies by broker and I don't believe that it is currently available in CAPS) currently trade at around $24.50 per share. For just under the next three years, the stock pays an annual dividend of $1.8125, which is equivalent to around 7.4% at today's closing price.
In April 2013, there will be a forced conversion of the preferred to Hartford's common stock using a ratio of 0.7384 shares of common per Series A share. Using today's price for Hartford's common stock, that's equivalent to a value of $33.18/share. Not bad, huh? An instrument that yields nearly seven and a half percent and then pays you a one-time 35% gain three years from now. Back of the envelope, that's approximately a 19% annual return. Of course, this return assumes that the markets don't collapse crushing The Hartford's aggressively positioned portfolio.
Hartford was one of the companies that the government gave TARP funds to, so it is fairly well capitalized today. My main problem with the company is that its reserves portfolio is one of the most aggressive of all insurers, with a staggering 25% (from the perspective of the industry at least) of its funds in equities. As someone who tries to position his portfolio conservatively and not at the whim of the overall market, this is not the sort of thing that I personally am looking for. However, if you are optimistic about where stocks are headed you might find this stock interesting.