Freddie Mac, 6.02% Non-Cumulative Perpetual Preferred Stock (FMCKL)

[BKfinancier]

Have you re run this analysis lately? And for Fannie?

[sidedraft]

Trend?

[sidedraft]

Worse than dealing with the mob.

All that Treasury wants is every penny of profit:

http://www.usatoday.com/money/economy/housing/story/2012-08-17/fannie-mae-freddie-mac-bailout-deal-change/57115448/1

[VivaLasVegas]

awesome! Very very helpful. Thank you from all of us on the board.

Cheers to you Radium!

[radiumsoup]

Analysis of Freddie Preferred ROI

[radiumsoup]

VLV:

I haven't looked into Fannie at all until just now... I just picked one knowing they're both roughly equivalent and I'd rather look at 20 stocks than trying to sift through 40.

I like the more recently issued variable rate ones which have a floor and no cap (some of the ones issued more than 10 years ago have caps.)

That said, if dividends are going to start back up, I believe there are provisions that require equal treatment between all preferred shares, meaning they won't start with the low interest rate prefs first. I haven't done an analysis yet to see precisely what the dividend rate of return on current prices would be, but you can generally assume the market will treat them all approximately equal right now since they should all share equally in any dividend cash to be split up among the group of preferreds. I believe, but am not certain, that Freddie can declare a partial dividend as long as all preferreds are given the same pro rata share of dividends. I know Fannie can do so, as it's explicitly stated in the $100,000 value prospectus.

Most of the Freddie prefs are $50, some are $25, and there are no other values (that $100,000 Fannie one appears to be convertible at $94 per common share - a laughable amount right now since FNMA is at $0.26). All of them are non-cumulative, unfortunately.

None of the Fannie prefs are cumulative either, it appears.

[chaarles]

They will be forced to pay dividends when they decide to pay dividends to the commons. They can have some good motives to pay dividends to the commons, share price, shareholder pressure when there are benefits, etc.
I'm buying more....

[radiumsoup]

yeah, I haven't been able to find info on what it would take to force dividends... I don't know if there are any triggers in the prosepctuses (prosepctii? ;P) which allow shareholders to demand dividends - but I don't recall seeing any such provisions when I did my initial DD in these... I think it's just a matter of "we'll pay them when we can and won't pay them when we can't... just trust us."

I think a lot of the Freddie dividends will be triggered by interest rates - when the interest rates go up, FMAC will make more and will be able to pay dividends again... and once they start being able to pay dividends, they'll be able to sell more preferred shares at lower rates, and can redeem the older higher-rate prefs with the proceeds, effectively refinancing the dividend payments, for lack of a better term.

[radiumsoup]

yeah, price/yield is where it's at long term. At these prices, you're looking at making 100% of your money back every year on some of these (once divis are paid again). Where else can you get that for fixed income? I mean, seriously, if I had a spare $100k to put on these, I'd do it in an absolute heartbeat. I'm hoping some other lotto plays I'm in cash out soon, because Freddie prefs are where it's ALL going for me pretty soon.

In the near-term, trying to guess which (if any) will get redeemed first is too much voodoo while rates are low... once interest rates start going up on the variable yield ones (are there more than one? don't remember offhand), the higher yield ones will probably be first to get redeemed (assuming they're already being paid dividends) due to the higher cost of keeping dividends going... but what do I know, that's just the way I'd do it if I were paying outrageous dividends.

I'm a huge fan of FMCKJ for that reason... it pays 3-month LIBOR + 4.16%, with a 7.875% floor. LIBOR rates were 5%+ as recently as 2007, and even at 0.5% now, it's $2 per share per year with the floor. And it's still trading under $2 now, but not for much longer. Ka-ching if it divis, ka-ching-o-rama if it redeems, and ka-ching-o-rama-ding-dong if it divis for a few years at higher rates and then redeems ;)

These are going to be win-win stocks in very short order, here.

[VivaLasVegas]

IFFFFFF they restart DIVI's on these with interest rates so F'n low on every product around the close.... you could see ALL OF THESE trade for CRAZY PRICES then.

The yields are these are Monsters.... All of them compared to what you can get on other securities.

Thoughts on the above reasoning appreciated.



Cheers

[chaarles]

I agree, but what would make them start paying dividends? They justdont have to. Hard guessing.
All the best.

[VivaLasVegas]

Buying up small chunks of these.

are you buying strictly on price vs. divi yields?

Or do you think a few are better for other reasons than the above reasoning.

Cheers!

[radiumsoup]

I have no hard information, but my instincts tell me that if they are going to redeem, it would be to avoid dividends. But, since they're already not paying dividends, there's no reason to redeem at this point; they're sitting on a pile of free money (proceeds from sale of preferreds with no payback schedule.)

I think it's more likely they will start dividends back up before they start redeeming preferreds - it's cheaper in the short-term.

[chaarles]

Radium, do you believe there is a chance for redemption the 30 june?

[radiumsoup]

HUGE volume spike just 2 weeks before redemption date opening (6/30/2012 is the first day FMAC can pay redeem these shares for $25 per share) - the 10 day average is 150k shares daily, 3MM+ shares trading today.

[radiumsoup]

Link to prospectus:

http://www.freddiemac.com/investors/pdffiles/071707cir.pdf