March madness!
It is fitting that Thursday is the first day of the NCAA Men's Basketball Tournament. The markets are continuing to react to snippets of non-news, everything is in the green on rumors of "Big Bank" interest in taking over First Republic (FRC) , and who knows what Friday will bring
In terms of news flows, I don't know. In terms of cash flows, for my firm, Excelsior Capital Partners, and for myself, I do know. There is a reason I gave ExCap the motto "cash flow never lies."
Our cash flows, the ones we derive from our investments, very rarely change. Sure, Exxon Mobil (XOM) and Chevron (CVX) , core names in my HOAX model portfolio, increase dividends with regularity, but the majority of my own and my clients' holdings are in fixed-income securities these days.
It's a simple math problem. The numerator changes very little, but my clients are most interested in the denominator. If we want to get $1,000 in income every month, how much of "X" do we need to buy to generate that. It's all linear math, it is not rocket science. But at times, like this week, for instance, it seems that nobody does that math. This has created enormous opportunities to invest in cash flows and generate above-historical-average yields and yields that represent real value creation, i.e. cash flows that grow faster than the rate of inflation.
Investing is a math-intensive business. It is not "mostly" numbers, it is all numbers. So when nitwits on FinTV or professional obfuscators like ARK Invest's (ARKK) Cathie Wood try to blind us with narratives -- X company is disrupting Y industry -- those of us with propellers on our beanies just tune them out.
But when people start freaking out and discarding securities of companies that generate strong cash flows and return those cash flows to investors, we act.
A security that I have been buying in size for myself and for clients this week is Zions Bancorporation Floating Rate Series A Non-Cumulative Perpetual Preferred Stock (ZIONP) . Zions Bank first issued these on December 6, 2006.
From a financial perspective, Zions Bank, as I noted in my Real Money article Monday, is as rock-solid as any financial institution I have seen in 30 years of crunching numbers. When I'm dealing with risky preferreds, I often use the phrase "xxx is not the hill to die upon." In contrast, Zions Bank, and, by implication, ZIONP, is the hill to die upon. So I am buying with both hands this week.
The math is straightforward... and overwhelming.
ZIONP, like most of the preferreds that ExCap and my clients own, is a retail product, so it carries a $25 par value. In the fog of war that has enshrouded regional banks since Silicon Valley Bank's (SIVB) collapse, ZIONP has fallen to about $17/share. That is 68 cents on the dollar, based on ZIONP's $25 par value.
That opens up a huge potential capital gain for ExCap in our ZIONP holding if Zions Bank is acquired and Zions' fixed-income instruments are converted at par. I don't think that is a likely outcome, but, these days, who knows?
If there is no "shotgun marriage" arranged by the FDIC between Zions and another bank, we will just happily collect the cash flows paid quarterly by ZIONP.
Here's the math:
ZIONP pays a quarterly floating-rate dividend that is the greater of LIBOR plus 0.52% or 4%. With 3-month LIBOR at 4.90714%, we use the spread percentage. ZIONP has an effective coupon of 5.3%... but that's based on par, and at $17/share ZIONP is light-years away from par value.
The real, annualized yield for ZIONP, based on today's rates is ((.0490714 + 0.52) × 25)/17. That's a fun calculation, isn't it?
It produces an effective, annualized yield for ZIONP of 8.0%. The usual benchmark for fixed-income securities is the 10-year U.S. Treasury Note which was gyrating wildly Thursday, but was last quoted at 3.58%. With a spread to UST of nearly 550 basis points, I believe ZIONP is attractive here.
Especially since ZIONP is completely protected against interest-rate increases, while the benchmark itself, the l10-year UST, has no such protections.
ZIONP is the hill to die upon. Just in the course of writing this column, ZIONP fell from $18/share to $17/share. So I fixed all the math in the preceding column, but only after I grabbed my phone and bought some more ZIONP.
Math is its own reward. Markets fluctuate, but calculus NEVER does. When values of fixed-income securities are being reduced for no good reason, the obvious move is to buy more. That's what I have been doing with ZIONP this week.
March Madness must be exploited. That's my job. Go Blue Devils!!!
