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A Tempting Preferred Pick

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June 01, 2010 – Comments (8) | RELATED TICKERS: HIG

 

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.

Deej 

8 Comments – Post Your Own

#1) On June 01, 2010 at 9:50 PM, MegaAsia (< 20) wrote:

Nice find Deej.  I think HIG is pretty fairly valued right now, but the preferred is attractive.

It would seem that an arbitrage opportunity exists if you don't want to take on too much market risk - long the preferred, short the common.

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#2) On June 01, 2010 at 10:36 PM, TMFDeej (99.32) wrote:

Thanks Mega.  That's how the Hartford Preferred shares were described to me by someone, but I'm still looking into them.  Another person just told me that there might be some sort of sliding scale for the conversion that would limit the upside of this trade.  

That's the great thing about the Internet, people can help each other research ideas.  Is anyone else out there familiar with this issue?

Either way, I'm not wild enough about Hartford to pull the trigger on it. It's not available in CAPS and it definitely warrants additional research before one buys it in real life.

Convertibles are interesting though.

Deej 

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#3) On June 02, 2010 at 5:41 AM, TMFDeej (99.32) wrote:

Chuck Akre of the Akre Focus Fund has been all over the place touting this pick lately. It's very possible that he is wrong, which is pretty bad.

Either way, I'm not wild enough about Hartford to pull the trigger on it.

" "Ticker: HIGPRA


Chuck Akre
Akre Focus Fund

Chuck Akre just launched his own fund, Akre Focus, after leaving FBR Focus, where he returned 12.6% annually from 1996 through 2009.

Akre, who keeps a third of his portfolio in financial services stocks, has a creative idea: convertible preferred shares of the Hartford Financial Services Group. These must be converted into common stock in 2013. Based on a price of $25, they offer a 7.25% yield, and Akre thinks a sizable gain is likely on the conversion. Over three years, he estimates, investors will reap annual returns of 18%.

The Hartford was hit hard during the financial crisis, but Akre thinks it's in good shape after recapitalizing. "It's an interesting, low-risk, decent turnaround play in a market with a lot of uncertainty," he says."

http://money.cnn.com/galleries/2010/fortune/1005/gallery.retire_rich_picks.fortune/2.html 

Deej 

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#4) On June 02, 2010 at 10:09 AM, YooCanFly (28.05) wrote:

interesting.

 

thanks for the info Deej, i love reading your blogs for different stock ideas! 

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#5) On June 02, 2010 at 10:28 AM, YooCanFly (28.05) wrote:

http://www.faqs.org/sec-filings/100323/HARTFORD-FINANCIAL-SERVICES-GROUP-INC-DE_8-K/y83397exv1w5.htm

 hmm

I think you got it wrong... its 0.7384 common shares per pref. share. so you would get... 0.7384 * current stock price, not 1/0.7284 * current stock price

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#6) On June 02, 2010 at 2:39 PM, YooCanFly (28.05) wrote:

thats why your own DD is needed.

I like Deej's blogs because he talks and focuses about STOCKS. not macro economics. 

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#7) On June 02, 2010 at 4:51 PM, TMFDeej (99.32) wrote:

Someone who has a lot of skin in the game and a good reputation, Chuck Akre, doesn't think that the A-Series Hartford preferred is worthless.  It is currently his mutual fund's largest holding.

I apologize for the confusion on the convertible issue.  I took what I read in quotes from Mr. Akre at face value, but I may have misinterpreted him.

To me, for a collection of blogs that's attached to a stock-picking game there's a whole lot of writing and whining about the economy and other random things and not a whole lot of discussion about specific stocks.  That's what I'm trying to do here.  

I mention a stock any time I came across an interesting one, either on my own or in my reading. I do not do extensive write-ups and deep due diligence on every single idea that pops up on my radar, only the ones that I really like and am strongly considering buying for myself.  

With a full-time job, independent consulting another several hours per day from home on the side, and two young children I barely have enough time to blog as much as I do.

Everyone should always thoroughly vet any idea before they purchase it on their own, regardless of the source be it an expensive newsletter or a free blog.

Thanks for the comments everyone. 

Deej 

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#8) On June 29, 2010 at 4:05 PM, fr4ji9 (< 20) wrote:

Actually the prospectus specifies a range of conversion factors based on the stock price of the common shares and gives a high and low range based on a conversion to a $25 share.  If the stock goes up past $33.857 you will profit since there is a floor conversion rate.  Conversely, if the stock is below $27.75 at the time of conversion you will lose money since there is a ceiling to the conversion ratio.

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