11 August 2010

Ford Motor Preferred Stock: Take the A Train

USA Today

 
Q: What is the difference between the various preferred securities issued by Ford Motor? Which one is better?

A: Investors who never heard of preferred stock just a few years ago, are trying to get up to speed quickly.

Preferred stock is a unique security that combines characteristics of bonds and stock. Like bonds, preferred shares make a specified cash payout to owners. But these payments aren't required, as is the case with bond coupon payments. Payments on preferred shares can be suspended by the company any time, like a stock dividend.

Preferred shareholders, however, get some protection. If preferred stock payouts are suspended, the back payments must be made before the company can pay a dividend to common shareholders. You can read more here about preferred stock.

Preferred shares can generate sizeable income, usually much larger than the dividends paid on regular common stock. Yields on preferred shares also can be higher than yields on a company's bonds.

Ford Motor's preferred securities are particularly popular. Now that the company's earnings have stabilized and the company has reduced its debt, payments on Ford's preferred securities would appear more secure.

But be careful. Ford Motor has two separate preferred securities that are quite different. These Ford Motor preferreds are in addition to preferred securities issued by Ford Motor Credit.

Both Ford Motor preferred securities issue payments quarterly, and are both callable, an important detail that I'll explain later. But other than these two important similarities, the two preferred securities are different. You'll want to make sure you understand the differences before investing:

•Ford Motor Co. 7.5% Notes (F.PRA). This preferred security is often referred to as the class A Ford preferred. You can get up-to-date information about its price here.

This preferred was issued at $25 a share at a yield of 7.5%. It's due in 2043. Currently, these shares are trading for $25.68 and as a result have a yield of 7.3%. You can read about the structure of this preferred security here. This is the Ford preferred security that's best for most investors, as I'll explain in a bit.

• Ford Motor Co. Capital Trust II (F.PRS). This preferred security is often referred to as the class S Ford preferred. You can get up-to-date information about its price here.

The Capital Trust II preferred was issued at $50 a share with a yield of 6.5%. It's due in 2032. You can read about the structure of this preferred security here.

The class S preferred has one important difference vs. the class A preferred: It is convertible. Each share of class S or Capital Trust II shares can be converted into 2.8249 shares of Ford common stock at any time. This right, however, comes at a cost, as I'll explain.

But first, another important aspect of the class S. During its financial crisis, Ford in 2009 suspended paying the dividend on Capital Trust II securites. The company later paid back the suspended dividends and resumed paying a regular dividend.

On both shares, you need to keep an eye on the callable option. Ford at any time can call either one. That means no matter how much you paid for the shares, the company may force you to sell the shares back at prearranged prices. Specifically, Ford can buy back the Capital Trust II securities at $50.65 in 2010, $50.33 in 2011 and $50 a share in 2012 and beyond.

Which preferred shares are better? For most investors, the Ford preferred A shares are best, says Ken Winans of financial advisory Winans International and author of Preferreds: Wall Street's Best Kept Income Secret.

Winans prefers the A shares for two reasons: First, the yield on A shares is higher than the yield on the S shares because there no conversion option. If you want the option to buy Ford shares, you should just buy the A shares and then also buy a special options called Long-Term Equity AnticPation Securities, or LEAPS, for short. Combining the Ford Preferred A shares with a Ford LEAP would give you a higher yield and the same possible upside, he says.

Meanwhile, remember that preferred shares, like stock, trade on stock exchanges. Prices of preferred securities rise and fall as investors determine how safe the preferred payments are, and yields move up and down accordingly. In this regard, Ford's class A preferred shares have been less volatile than shares of the S preferred securities.

The S preferred security's price crashed 72% from its peak during the downdraft of 2008, Winans says. The price of the A preferred security fell 59% during the same period.

So if you're looking to own Ford preferred, and want to limit your volatility and get the higher return, go for the A shares.

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