No. of Recommendations: 1
Alright Paul, since you were so helpful before, I’ll hit you with some more questions. No good deed goes unpunished...

I’m interested in looking at preferred of companies in dire straights. Because of their income, they seem like a safer option than common shares, but their convertibility means they retain the greater potential upside of common equity in a recovery. Here’s one as an example: Ford preferred S shares. They are currently yielding at 45%, and trading at only a slight premium to common (just under $8 to $2 and change for common). The extremely high yield, coupled with the capability to convert these to common in the long term seems attractive. But, I’d like to make sure that I understand how these things work. I’d appreciate any corrections, or a simple affirmation, if I’m correct (not terribly likely I’m afraid, LOL)

Here’s their description and vital statistics from QuantumOnline:
Symbol F-S CUSIP: 345395206
Description from quantumonline:

Ford Motor Company Capital Trust II, 6.50% Cumulative Convertible Trust Preferred Securities, liquidation preference $50 per share, guaranteed by Ford Motor Co. (NYSE: F), redeemable at the issuer's option on or after 1/15/2007 at $50 per share plus accrued and unpaid dividends, maturing 1/15/2032, distributions of 6.50% per annum are paid quarterly on 1/15, 4/15, 7/15 & 10/15 to holders of record on the 15th day prior to the payment date. The preferred shares are convertible any time at the holder's option into 2.8249 common shares of Ford Motor Co. (NYSE: F), an initial conversion price of $17.70 per common share. The company has the right, at any time, to defer interest payments for up to 20 consecutive quarters (see IPO prospectus for details). The trust's assets consist of the 6.50% Junior Subordinated Deferrable Interest Convertible Debentures due 1/15/2032 which were purchased from the company using the funds generated from the sale of the trust preferred securities. See the IPO prospectus for further information on the convertible preferred securities by clicking on the ‘Link to IPO Prospectus’ provided below.

issuance date: 1/02
coupon rate: 6.5% ($3.25 per annum)
callprice: $50
convertible to 2.8249 F common shares (call date 1/15/07)
conversion price: $17.70
maturity date: 1/15/2032

Here’s what I think I understand:

1. first, these are cumulative securities. So, while a dividend can be skipped, it rolls over to the next quarter, and must eventually be paid to the shareholder of record.

2. dividends can be skipped for 5 years, but accrue. I assume that these accrued dividends are paid to shareholders of record at the date that they are finally paid. So, if they skip two years, whoever is holding these securities will receive ($3.25 x 2) + $0.81, or $7.31 per share held.

3. They can be converted at any time to 2.8249 common shares (even if the common shares are not $17.70; that was simply their value at the issuance date in January of ’02, correct?). So, if F common advance faster than the preferreds and it’s worthwhile, you can convert at any price, right?

4. For preferred stocks, you do not pay any partial interest to the current holder at the time of purchase (i.e. you don’t owe them a prorated portion of the current dividend). This is not true of bonds, right? You pay the current holder the prorated portion of that quarter’s coupon, right?

5. I also assume that any deferred dividends will only be recovered if you hold until they are finally paid. They are lost if you sell. Conversely, if the dividends are currently deferred and you buy the stock, you do not owe the seller those deferred dividends, right?

6. These shares are currently yielding at 45%, and haven’t deferred at all. I verified this through my brokerage account by viewing a historical dividend chart. Is there an easier way to check this than historical charting? Does quantum online, or anyone else track deferrals and defaults? Could there be any advantage to looking at cumulative issues that are currently deferring dividends, or is that just flat out dangerous? It seems likely that no one would skip a payment on these instruments until they were at death’s door.

7. In the case of companies that might be looking at federal assistance, there’s been some sabre-rattling demanding that participating companies should be required to suspend their dividends. This has been resisted so far, but “the tides are changing” after this election. How would preferred issues fall into this? They aren’t equity, so these aren’t technically dividends, right? They’re more like a bond coupon, aren’t they? My take is that they could not force suspension of preferred stock dividends.

8. Are orders filled through brokers just like any other stock, or are trading commissions different? (this probably differs from broker to broker, but what the heck, I thought I’d ask anyway).

Finally... I’m not used to thinking about income investing. I’ve always stuck to common stocks. How often do defaults occur? What happens when they default (as far as your account is concerned)? Does their value just fall to zero, and that money vaporizes? Thankfully, I’ve never had a stock that went to zero. I’m just not sure of the mechanics with bonds. Does a default leave you high and dry? You certainly retain some legal rights as a bond holder. Does your broker enforce those legal rights, or do you have to do so individually?

I hope that this makes some sense. Thanks in advance, and apologies for the length...
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