23. Calculate Yield to Call and How to buy Preferred Stock Video Lecture | Become an Expert: Value Investing - Business Basics

welcome to course to unit 4 lesson 2
what is the value of preferred stock in
this lesson we're going to learn three
lesson objectives
the first lesson objective is where can
you conduct research on preferred stock
the second lesson objective is where can
you find the essential elements of
preferred stock and the third lesson
objective is how can you determine the
yield call on a preferred stock so let's
get started on the left-hand side of my
screen I have a website up that's called
Quantum online comm and over on the
right hand side you can see I have the
Buffett's books com website up which is
probably the page that you're viewing
this video from and the reason I have
the quantum online.com web page pulled
up is because this is probably the best
website you can go to in order to
conduct research on preferred stock so
when you come to this website everything
on their site is free and I can't
recommend this site strongly enough when
you go here
I'd recommend signing up for an account
with quantum online because then you'll
have full access to all their different
search results in the different
preferred shares and the access to the
site so when you when you sign up for an
account you can see I have an account of
my name right there the first thing
you're going to probably want to do is
go to this income table and you'll click
on this and you can select all preferred
stock when you pull that up it gives you
a list and you can see there's many of
pages one of 11 pages and it lists all
these preferred stock that you can
invest in this is definitely the most
comprehensive spot you can come to in
order to find something that's just
simply dealing with preferred stock
everything else you'll probably search
if you do a search online for looking at
preferred stock comes up with just kind
of a hodgepodge of information nothing's
really organized really well and this is
the one site that does that great is
they really have organized information
so we'll just start from left to right
and as you can see at the very top you
have the symbols the description of the
security itself
which stock-exchange that security is on
the date that the security was
introduced which is the IPO date the
coupon rate and the annual amount that
you'd be paid for a dividend it says the
coupon right there you can say the
dividend rate the call price that the
that the dip or that the preferred stock
would be called at the date for the call
and also the maturity date the Moody's
RSP rating which is very useful when
you're looking at preferred shares
because they often have a little bit of
debt and sometimes doesn't display some
of the best financial decisions for the
companies that you'd be investing in it
tells you whether it's a 15% tax rate or
not whether when you buy that and it has
the full prospectus where you can go
ahead and pull up all the detailed
information about each specific
preferred stock then the last thing it
has is the distribution dates and it
like this very first one that we're
looking at here I'm also just point this
out you can see where it says suspended
in red on this one that means that that
coupon or the the dividend that this
preferred stock was paying it's no
longer paying that so that's things like
that are really important to be able to
see and it's really nice because this
gives you all the really important
information all in one line for a
preferred stock to be quite honest with
you you're going to be hard-pressed to
find this type of information
consolidated all in one place anywhere
else so that's one of the reasons I'm a
huge proponent of the quantum online
website so one of the nice things about
this website is at the top if you wanted
to filter all these preferred stocks
based off of the description you can go
ahead and click security description up
here at the top and then what it's going
to do is it's going to put the most
appetizing ones at the top and the least
desirable at the bottom based off of
that description so you're probably
going to see something that's a high
yield and something that's a cumulative
preferred share at the top like this one
that we see here
now something that you don't want is
that something that has a suspended
dividend payment so let's go ahead and
try this for something else here let's
say that something that's really
important is the call date whenever
you're looking for a preferred stock you
want to have a longer call date opposed
to a shorter one because if the call
date is tomorrow and it's a very high
yielding preferred stock there's a good
chance that that company is going to go
ahead and buy those back so they don't
have to pay that high dividend so the
longer that call date is the longer that
you have the whole debt preferred stock
the better so let's go ahead and filter
based off of that so we go ahead and
click on call date and you can see that
it pulled up all these securities based
off of the longest yielding call dates
and if you would go through the next
couple pages you'd see that the call
date keeps decreasing so here this this
very top one is for Simon Property Group
you can see it has an 8 and 3/8 percent
yield on the dividend and this is a
cumulative preferred stock which is good
we'll talk about that in just a second
and you can see that the call date on
this is 2027 so right now the year is
2012 and so you have approximately 15
years on this before you're going to
have the the company's ability that
Simon Property Group has the ability to
start buying these preferred shares back
so that's a good thing that you're
buying this especially because it's it's
yielding eight point three eight percent
which is very high now we don't know
what it's trading for and that's
something that we're going to get into
next but the point I really want you to
take away and this is the first lesson
objective is how powerful this website
is Quantum online and coming in here and
being able to sort all these different
preferred shares being able sort out and
find something that you're really
looking for because all the information
is all available on that one screen
capture and if you really want to dig
deep let's say that you wanted to go
ahead and take a closer look at this
Simon Property Group you can pull up
this prospectus okay let's go ahead and
click on that okay and it's I open it up
in another window
and here's all the details that you
would need to know about that preferred
chair okay if you were going to buy this
preferred stock this gives you all the
information all the details that you
need to know and that information is
right there at the tip of your of your
finger by just clicking on that
prospectus right there okay so that's
something that you'll definitely want to
take a look at something you'll want to
get in here and play around with and
this website I can't speak highly enough
about it okay
so let's go ahead and talk about our
second lesson objective which is where
can you find the essential information
and really what is the essential
information okay so we're just going to
go step by step here the first thing
that I really look forward now this is
something you're going to have to make a
determination for yourself is I want
something that's a cumulative preferred
stock okay and the reason I want it to
be cumulative is because that means the
company has to ultimately pay that
dividend that they're that they're
claiming they have is that eight point
three eight percent the only way they're
not going to pay that is if the if the
company is going to be going bankrupt
and they literally cannot make payments
to anybody and they're in the process of
liquidating so that's when you're not
going to get your payment now the
company does have the option to defer
those payments they can let's say that
they owe a dollar every year so they're
paying you a quarter per per share every
quarter okay they're paying you
twenty-five cents every quarter let's
say the company is running into some
rough times and they don't want to make
that payment they can still withhold
that that dividend payment under a
cumulative preferred but when they do
have enough money to start making that
payment they have to make up all the
payments that they missed before they
can pay anyone in the common shares or
anything like that so you're eventually
going to get your money especially if
you hold it to the call date or to the
maturity date you're going to receive
that as dividend payments and that's
what's important that's why you want to
buy a cumulative preferred stock now a
non-cumulative preferred means that the
company can just miss those payments and
they don't have to make it back up to
you so those are something that you
really want to avoid so if
look down here on this cou via preferred
fund see how it says non-cumulative
right here where I have that highlighted
that's in my personal opinion something
you really want to avoid so that's the
first thing that we're going to look for
when we when we go down here in the
security description we're always going
to be looking for something that's a
cumulative preferred stock okay so the
next thing I had briefly mentioned was
the call date so as we come over here
and let's just use that Wachovia one
again we can see that the call date on
that security is twenty twenty two so
there's ten years from right now
essentially that you could earn that
preferred stock before it could be
called back by Wachovia where they'd pay
you now the rate that they're gonna pay
you would be this call price right
there's the call price is $25 so if they
were going to buy that preferred share
back from you on that date they would
pay twenty five dollars in order to get
that preferred share back okay now the
maturity date okay if you remember with
bonds the maturity date is typically
when that when you would receive that
call price or the par value of a bond
you'd receive that back but on a lot of
preferred shares you'll see that there's
none listed meaning that that preferred
share can stay out there forever if what
cobia wanted it to stay out there they
can keep it out there for as long as
they want so with a non-cumulative
preferred share technically speaking
likova could issue these preferred
shares never make a dividend payment and
just keep those preferred shares out
there for as long as they want and not
make one single payment now if they do
that they they can never pay their
common shareholders a dividend which you
know that wouldn't last very long
especially if that's how a business like
what cobia would be paying their their
shareholders consistently instead of
through the equity growth so that would
be something that the company would have
to do but technically speaking that's
what not having any type of maturity and
having a non-cumulative preferred share
they could do that if they wanted to so
those are things you really want to
watch out for I really like to find
these that have a call date that's you
know within a reasonable amount of time
and I always want to buy a preferred
share that actually has a maturity date
to it so just some things to think about
when we get into using the calculator
over here on the buffets books website
you can play around with adjusting the
the years to the call day and you can
see how that adjusts the yield that
you're going to receive okay one of the
most important things you can do when
you're talking about preferred shares is
understanding how much debt the company
has okay when we look over here and this
is wonderful that they have this on this
site they have the Moody's rating and
the SP rating and if you're really not
familiar with what these are I did a
lesson on this back in course to unit 2
I have a whole video on understanding
these these ratings but this gives you a
real quick idea of the capability of
this company to actually fulfill those
payments so when you look at this
Wachovia and you see that they're you
know an a-minus that's a that's that
this company is able to meet their debt
obligations with this type of rating so
the chances of you getting your dividend
payment probably pretty good you're
probably going to receive that that
dividend payment but if the company
falls on hard times it would be stopped
in the split second because it's a
non-cumulative preferred share so if you
really want to dig deep say you were
looking at this company and this is
something you were really interested in
buying something that I would personally
do is I would pull up the common shares
and I'd look at the Wachovia common
shares and I would go ahead and look at
the debt to equity ratio I would look at
the current ratio I'd look at all those
important things that we learned about
in course 2 unit 3 that's where you're
going to be able to assess the health of
the company and when you assess the
health you're also assessing that
company's ability to continue making
those dividend payments I already
pointed out the prospectus and that is
something that you have to read if
you're actually going to be buying
preferred stock so that's where you can
access it and for whatever reason let's
say that you couldn't pull it off of
quantum online website you can go to
Wachovia or you can talk to the Investor
Relations let me show you something here
oh fast let's say we go over here this
symbol when you click on the symbol and
quantum online pulls up all this
information specifically for that
security and if you go down you can see
that they have phone numbers listed and
they have a point of contact
Alice Lehman and here's her phone number
for the Investor Relations portion for
Wachovia and so you can call her up and
ask her any question you want about this
preferred share so some of the
information you're pulling from this
site is pretty amazing to be quite
honest with you and I think you'll
really find it really useful okay so
when we're looking at these different
preferred shares you're probably
wondering well I have no idea how to
assess how much this thing's worth or
what kind of return I'd get on it it
just really doesn't make a lot of sense
and so what we're going to do is we're
going to go ahead and value one of these
preferred shares and we're going to use
the Buffett's books yield to call
calculator now the reason that I'm using
the yield to call is because a lot of
preferred shares as soon as they reach
that call date that company wants to go
ahead and and repurchase those preferred
shares because they don't want to
continue paying an 8% interest rate or a
9% interest rate they want to go ahead
and buy those back so that the equity of
the business is restored and also
they're not making large interest
payments so my assumption and this is me
personally you'll have to decide the
method that you'd like to use but I
always like to look at the yield that
I'm going to get up to that call date
that I'm going to go ahead and have
those shares bought out from underneath
of me from the company so that's what
I'm looking at so let's go ahead and do
this I'm going to go ahead and just go
up here and show you a search tool on
this website so you go up to the top and
the preferred stock that I'm looking at
is SPG - J okay and I'm searching by the
ticker symbol and I hit Search
and there you can see it pulls up this
preferred share so
when we look at this one it's listed on
the new york stock exchange the coupon
rate is eight point three eight percent
and that's because it pays a four dollar
and 18 cent dividend okay every year
that's the annual dividend payment now
most likely you'll receive that divided
in the four payments and you'll receive
it every three months but that's what
you make for the year okay now if
they're going to call this this
preferred share meaning they're going to
buy it back from you they're going to
pay $50 for it okay the call date on
this is 2027 okay so we have
approximately fifteen years before this
preferred share is going to be able to
be called back okay it has no maturity
date okay so that's something that kind
of beware of especially with where
interest rates are right now interest
rates are at an all-time low
and what you'll see is that or the
premium that this preferred share will
trade at is going to be tied to as
interest rates rise that premium is
going to become less and less remember
the value of a preferred share the value
of a bond decreases as interest rates
increase and vice versa okay so when
interest rates go down the preferred
share and the bond are going to go up so
with interest rates being really low
this isn't a real good time to be
looking at preferred shares or bonds now
if you need something in the short term
just for a year or two then this might
be something that you really want to
look at okay so let's go ahead and start
plugging some of these numbers into our
calculator over here on the Buffett's
books website so our annual dividend
payment we see is four dollars and 18
cents so we can put in the whole thing
for 0.1875 okay when we go to the next
which is the call value and we said that
the call value is $50 so we to Center 50
and if you remember don't put any dollar
signs or percent signs in here just put
the raw numbers in so the calculator
works properly
okay the years to the call date now
we'll just do this real fast we'll put
in 15 years but if you really wanted to
do it accurately
you'd have to estimate that that might
be you know 14 and a half years or 15
and a half I
bad doing the math on the dates ergo
fast but we'll just put 15 in here real
fast and then the market price okay so
the one thing that we don't see on here
is what this preferred stock is
currently trading for and we can figure
that out by clicking over here onto the
new york stock exchange chart okay so
let's go ahead and click on that okay so
as we pull up this is the information
and you can see how this preferred chair
has been trading but we see that the
price that it's trading at right now
$69.50
okay so let's go ahead and plug that in
as our market price $69.50 okay and
let's go back to our page here okay so
when it says the coupon rate is eight
point three eight percent that doesn't
mean that you're going to get eight
point three eight percent that just
means that if you could buy it at the
original price that they issued it at at
which was fifty dollars you would get
that eight point three eight percent
until the the preferred would be
called or you just continue to receive
that forever since it has no maturity
date but that's not the case here you're
buying this preferred chair for $69.50
if you would buy it today and not for
$50 so that in that return that dividend
payment is going to be different and
that's what this calculator is doing is
it's figuring that out for you based off
of the assumption that this company is
going to repurchase these shares at that
call date so as soon as we hit calculate
we see that the yield to call is four
point eight three two percent okay so
that's a significant difference so the
person that would go and say wow this
preferred share is you know it's a it's
a cumulative preferred which is good
that's what I'm looking for the the
Moody's and S&P rating is you know
within my tolerance I like that I'm
going to get eight point three eight
percent on this if I buy it and that's
not the case at all because you're
paying such a large premium you're
paying almost seventy dollars to
purchase this stock and it's only
callable at fifty
that's why your yield to call is much
lower than the eight point three eight
you're actually seeing four point eight
three two percent and that's the thing
that you really got to focus on when
you're buying preferred shares you've
got to do this simple calculation you've
got to figure this out because if you
don't you're going to be purchasing
something that you think that you really
think you're getting a large return and
in fact you're not so you might be
better off maybe going and buying a bond
which is more secure than the preferred
share that's paying a higher return than
this 4.8% buying a corporate bond and
it's it's less risk so those are the
things you really got to consider when
you start looking at preferred shares
and you've got to understand all this
terminology and I know it's going to
take time but if you go back and
re-watch some of these videos and you
get on to this website this quantum
online website and start playing around
and clicking and really start and
understand it it's all going to start
making sense for you so this concludes
course to unit 4 lesson 2 we covered
three lesson objectives the first was
where we can conduct research on
preferred stocks the second lesson
objective was where can we find the
essential elements of a preferred stock
and the third that lesson objective was
how to determine the yield to call on a
preferred stock so I hope this lesson
was helpful in understanding how to
calculate all those things and I'll see
you guys in the next lesson