Every once in a while, a portfolio manager has a eureka moment. "Damn, this actually works!"
I had one such moment last night after I got off a call with a West Coast client. For his account we are buying the key component of my FLOAT portfolio, which is entirely composed of floating-rate "preferreds."
FLOAT, which is behind my site www.excelsiorcapitalpartners.com, included PNC-P (PNC Financial Services Group (PNC) ), which was called by PNC as of Nov. 1. The PNC-P call included, as is customary, the final quarterly dividend payment of $0.43, so with a cash flow of $25.43 ($25 face value plus the $0.43 dividend payment) we made out well on our PNC-P cost basis, which was about $25.30.
To replace PNC-P, for this particular client, I went to another FLOAT name, Reinsurance Group of America (RZA) . According to my fixed-income bible, www.quantumonline.com, RZA is:
Reinsurance Group of America Inc., 6.20% Fixed-to-Floating Rate Subordinated Debentures due 2042, issued in $25 denominations, redeemable at the issuer's option on or after 9/15/2022 at $25 per share plus accrued and unpaid interest, and maturing 9/15/2042
Also, according to Quantumonline, RZA pays dividends based on the following formula:
Commencing on 9/15/2022 to the maturity date the Debentures will bear interest at an annual rate equal to three-month LIBOR, reset quarterly, plus 4.37%.
With a stated coupon of 6.20%, we see that in the current bond market (which is closed Friday, so I will use Thursday's figures). The three-month London Interbank Offered Rate -- that benchmark interbank interest rate for major global banks -- is 4.59%. So, effectively, adding the spread, RZA would be yielding 8.96% on an annual basis, not its stated 6.20% coupon.
Wow! That's some serious cake, man. And that's the world my clients and I live in. We can lock in 9% yields, while the rest of the market tries to once again overpay for Nasdaq names that offer virtually zero return of cash -- the Invesco QQQ's (QQQ) yield 0.74% on an annualized basis as of today. That's how I roll.
But you have to make sure you are dealing with financially strong issuers. Reinsurance Group of America (RGA) has an equity market cap of $9.3 billion. In its recently reported third quarter, RGA generated $284 million of net income ($4.19/share) on net premiums written of $3.25 billion with excess capital of approximately $1.3 billion. RGA will be just fine, thank you....
There you have it. You can place your bets as the Nasdaq casino, which, even after the rally of the past two days, has produced a capital loss of 29% year-to-date, or you can lock in a yield on RZA of at least 6.2%, which in today's interest rate markets is actually yielding 9.0%.
It's your choice. I think you can figure out which choice my clients and I are making.
