The sudden meltdown in the high-yield bond market doesn’t show any signs of letting up, especially with the US economy continuing to weaken, observes Roger Conrad, editor of Conrad’s Utility Investor.
But with pain comes opportunity: For the first time since 2009, fixed-income securities issued by essential-service companies trade at favorable valuations.
The latest addition to our Conservative Income portfolio, AES Series C Convertible Preferred Shares (AES-C), recently slipped below its call price of $50 a share for the first time since 2010.
I’ve covered AES (AES) and its preferred shares since the early 1990s, when the company was known for buying and building power plants in far-flung markets worldwide.
This strategy saddled the company with an unmanageable hodgepodge of assets that came under severe pressure during the relatively mild 2000-2002 recession.
On the verge of bankruptcy in October 2000, AES founders and biggest shareholders brought in new management that focused on deleveraging and paring the portfolio down to the most profitable assets.
These efforts saved the company and enabled it to weather the Great Recession with aplomb. Today, AES is in the best financial shape in its history.
Although the company’s fourth quarter earnings likely suffered from the US dollar’s strength and exposure to economic weakness in Brazil, the firm should also benefit from the retirement of $250 million worth of fixed-income securities.
We also expect the company’s core operations to post solid results that support the 10% increase to its common dividend.
AES Series C Preferred Shares mature on October 15, 2029, at which point holders will receive either $50 per share in cash or 1.4216 shares of the company’s stock, whichever is worth more.
With AES common stock fetching less than $10 per share, a cash payout seems more likely, though management’s credible guidance for steady earnings and dividend growth should swing the pendulum in the other direction in coming years.
In the meantime, we’ll collect an almost 7% yield on the preferred shares. AES Series C Preferred Shares rate a buy up to $50; prospective investors shouldn’t chase the stock above its conversion value.
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