Income options

With the market historical highs, It is harder to find good value stocks. On the other hand, there are not many good alternative income investments to invest in while waiting for stock prices to come down. I did find a couple that are worth sharing. Both of these have a couple things in common:

  • Decent yield.
  • Relatively safe investment.
  • Short term. At these rates, I would stay away from long term bond or preferred stock investments.

SLM Corp Series A CPI Linked Notes

  • Symbol: OSM
  • Principal Amount: $25
  • Coupon Rate: CPI Linked + 2%
  • Call Date: Not callable
  • Mature Date: 3/15/2017
  • Distribution Dates: Monthly
  • Current Price: $24.30

OSM will mature in less than 3 years. It give a CPI linked monthly dividend (currently 3-4% annually). I expect the price to move from $24.30 to $25 within in the next year. If that happens, you are looking at a nice 7% return for a year for a relatively safe investment. 

Read more about it here.

Bank of California Senior Notes

  • Symbol: BOCA
  • Principal Amount: $25
  • Coupon Rate: 7.5%
  • Call Date: 4/15/2015
  • Mature Date: 4/15/2020
  • Distribution Dates: Quarterly
  • Current Price: $25.66

Boca is giving around a $.50 dividend at end of this month. So, it is almost trading at par value. You have to be careful not to buy it at a high price since it is callable next year.

Read more about it here.

Disclosure: I am long OSM and BOCA. 

Sallie Mae Preferred Opportunity

A couple of days ago, Sallie Mae (SLM) announced that they would split the company into two to increase share holder value. 

Company A will be “an education loan management business comprised of the company’s portfolios of federally guaranteed (FFELP) and private education loans, as well as most related servicing and collection activities.” It’s “principal assets are likely to consist of approximately $118.1 billion in FFELP Loans, $31.6 billion in private education loans, $7.9 billion of other interest-earning assets; and a leading education loan servicing platform that services loans for approximately 10 million federal education loan customers, including 4.8 million customer accounts serviced under the company’s contract with the U.S. Department of Education. In aggregate, this company will own approximately 95 percent of Sallie Mae’s existing assets and remain obligated for the company’s senior indebtedness.”

Company B wil be a “private education loan origination and servicing businesses.” The “assets are likely to include approximately $9.9 billion of total assets comprised primarily of private education loans and related origination and servicing platforms; cash and other investments; and the Sallie Mae Upromise Rewards program.”

The transaction is expected to close under a year. Here is the slide deck. I have never been a fan of SLM’s business, but there may be an opportunity in the preferreds.

I wrote about the floating rate preferred (SLMPB) a couple months back. The preferred went down a bit after the announcement after Moody’s downgraded all debt and preferred because they would be lumped with Company A. However, a funny thing happened, a reader of hypezero emailed me saying that it is possible that the preferred could be redeemed at full par value ($100, currently trading below $70) at the day of the announcement. Here is his explanation:

  • “Unlike bondholders, Preferred Shareholders are owed a “Fair Allocation” in NewCo. If the plan is to redeem the Preferred Shares before spin-off, obviously no “Fair Allocation” in NewCo. is necessary.  Since no disclosure/guidance on Preferred “fair Allocation” was provided I expect the shares will be redeemed prior to spin off.”

I was a bit skeptical, but yesterday/today it is up over 10% on huge volume. The volume yesterday was over 1 million compared with the average volume of 64,000+  Maybe someone with more resources has figured this out as well. The other explanation I thought could make sense was in the preferred prospectus. It says:

  • “The board of directors maintains a committee whose purpose is to monitor and evaluate our proposed actions that may impact the rights of holders of our outstanding preferred stock.” Obviously, this split would be a detriment to the preferred. Here is a link to the prospectus.

Risks

Obviously, there are risks to this investment:

  • The planned split off does not go through.
  •  The preferred is just part of Company A making it a riskier investment. An analyst did ask about the preferred on the call and the CFO said that the preferred will stay with Company A.

Disclosure: I am long SLMBP

 

Sallie Mae Preferred Looks Interesting

Sallie Mae (SLM), the education loans company, has a preferred floating rate stock that is very interesting.

  • Par Value is $100.
  • Currently trade around $60.
  • Dividend is floating based three-month LIBOR plus 1.70% per annum. Three-month LIBOR is at an all time low. Here is the libor rates history. The last four dividends add up to $2.14 or 3.5% at the current price. 
  • They are callable at anytime at $100. They do not mature.
  • They trade on NASDAQ under the symbol SLMBP. 
  • The are non cumulative meaning if the company misses a dividend payment, they don’t have to pay later.

The positives:

  • For every 1% the libor rate goes up, the stocks yield will go up 1.67% due to discounted stock price.
  • If LIBOR rates go up from historic lows, the stock price will go up significantly. For example, in 2006-2007, the three-month libor was around 5+%. If rates go up to that level, this stock will yield 11+% at the current price of $60. During that time, the stock was trading around par value or $100.
  • 3.5% is a decent yield in this environment. 
  • SLM is a $9 billion company.
  • Taxed at 15% dividend rate.

The negatives:

  • Need to more research on SLM. The security is only good as the viability of the company. 

I will update the site once I do more due diligence on SLM.

Disclosure: I do not own SLM