Fannie Mae Preferred S (FNMAS)

[Joe Stocks]

Why would someone convert to common from preferred?

$1000 will buy you 95.2 shares of FNMAS.
$1000 will buy you 249 shares of FNMA.

Max value of FNMAS if FNMA comes out of conservatorship probably about $27 per share if the preferreds yield 7%.
$27 X 95.2 = $2570.

Max value of FNMA is not so easily defined. I think I have seen some estimates of $15 after dilution.
$15 X 249 shares = $3735.

Post conservatorship the holder of FNMAS will see $184 per year in dividends once dividends are resumed.

Post conservatorship I would think the common would see no more than about a 4% divided or $149 per year.

If holding for the potential 7% yield, probably holding the preferred would be best.

For someone more interested in capital gains (take the profits and invest in other opportunities) the common will probably be better.

As I have said before, I don't see the preferreds getting a dividend until the enterprises are fully recapitalized with excess capital. At that point they may be able to pay a dividend to the common as well soon after resuming the preferred dividends.

My question here is if the preferreds have reached a level where the reward no longer justifies the risk. It appears several have locked in profits. I think the common could pop to a higher multiple if we get the news we are all looking for.

With the common getting up to $4 here and moving up, I don't know if it is worth converting at much higher levels. Perhaps the common will not see the higher multiple, or $15 PPS.

Much easier for me to convert when FNMA was $1.20. Now?

JMO