FPRS and Alternative Investments

Stocks are a big part of any portfolio.  But they can’t be the end all – I don’t care how diverse you are in choosing those stocks.  To that end, I try to find other types of investments so not only am I diverse in the companies that I invest in, I am diverse in the instruments I use.  A few of these instruments are corporate paper, preferred stocks, and convertibles.

Back in Dec. 09, my financial advisor turned me on to FPRS, or the long legal name of Ford Motor Company Capital Trust 2.  I bought a block.

So what is it?  FPRS is a convertible preferred.  Here is the skinny:

FprS can be converted into 2.8249 Ford common shares any time before January 15, 2032.  It pays a $3.25 annual dividend per share.
It can be called by Ford at par value ($50) any time before January 15, 2032.  On January 15, 2032 it will be redeemed at par value for $50.

So this thing has a lot of characteristics of bonds and stocks, with the caveat that it is a preferred and a convertible – if there are dividends to be paid, this has priority over the common.  And in the grand pecking order in case of bk, you are after the paper but ahead of the common.

Ford hasn’t paid a dividend for a long time – FPRS was about a year and a half in arrears.  If Ford suspends their dividend, the dividend payments on FPRS go into arrears, and it gets paid before any of the common gets a taste of any dividend.  And not only does FPRS get paid, it gets paid ALL of the missed payments.  I got paid today by Carl’s hero Alan Mullaly, king of the debt cramdown to the tune of $5.08/share.

The current share price for Ford is $11.86, making FPRS worth $33.50 if you decide to convert it to common.  My original block was bought for $35.44 so I am almost even as far as redemption value goes on that.  I doubled down yesterday at $43.74.  At the $35.44, my dividend payment gave me a 9.17% yield – but remember that I bought these in Dec. 09, so I got a full year of dividends in arrears for free.  Nice.  The current $43.74 price puts the yield at 7.4%, still great.  The key here is the $50 call – I have a sneaky feeling that Ford will be calling these pretty soon to keep retiring debt and I believe others are thinking the same thing as the price is heading close to that $50 mark.  Either way I am a winner as I am really in it for the yield.  Of course the previously mentioned yields are pre-tax.

I have used a simple buy and hold strategy with this thing, but you could certainly lever it with a convertible hedge strategy – but the price is getting pretty high and a convertible hedge is a pretty complex strategy for what we are trying to preach here (although I like it since it is market neutral).

Now, of course, this thing has risks, such as Ford could go TU at any moment – which is what GM and Chrysler did before they got on the federal teat.  I guarantee the GM and Chrysler bondholders and common holders (are there any left?) are hating those dogs right now.  Sometimes you need big stones when taking on the type of risk that Ford had back then – but no risk, no reward as the saying goes.  All the news from Ford has been pretty upbeat lately, and this has been a huge winner for me.  I think the F common isn’t a bad play right now either, but that is a different discussion.

Don’t ignore different types of investments in your portfolio for not only risk diversification, but asset diversification.  Preferreds and forms of them have been a major area of concentration for me in the past several years.

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5 thoughts on “FPRS and Alternative Investments”

  1. Very cool post and that has worked out well for you.

    Damn I forgot about that Ford post it is funny when you look back at your own posts and re-read them and laugh it is like a time machine.

    How did you find those? Did your adviser find them or did you? And if it is you, when do you sleep?

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  2. Also Dan if you can think of a photo that would go up top better than the goose on the ice floe I am all over it. I probably will go through my photos and look for a candidate. Make sure it is landscape-ish.

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  3. I mentioned in the post that my financial advisor found this one. Back then I thought he was nuts as anything that has to do with Ford is rated “speculative” but I am glad I went along for the ride. Sometimes you have got to grow a set. Hope you noticed the new category I created for this post as well.

    I agree with looking back at your old posts and laughing I do it once in a while.

    And I don’t sleep very much as you know.

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  4. I was clicking through the old links (because I am a perfectionist nut, for God’s sakes it is 2 years later) and noticed that the FPRS link didn’t work anymore.

    Just like Dan said – the stock was redeemed in 2011 for 50.33 / share making it a big winner, in addition to the dividends he received.

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