Would You Like to Buy Preferred Stock? Part 2

This is taken from the Ford Motor Company Capital Trust II 6.50% Cumulative Convertible Trust Preferred Securities (liquidation preference $50 per preferred security) Prospectus Supplement to Prospectus dated January 24, 2002. This Preferred Stock Computer Symbol from ZionsDirect Online: “F/PS”.

This information explains the Preferred Stocks “Distributions on each preferred security is payable at the annual rate of 6.50% of the liquidation preference of $50 per preferred security.

Distributions will accrue from and including the date on which the preferred securities are first issued (anticipated to be January 30, 2002) and are payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing April 15, 2002. The amount of distributions payable for any period is computed on the basis of a 360-day year of twelve 30-day months.”

“So long as no indenture event of default has occurred and is continuing, Ford has the right under the indenture governing the debentures to defer the payment of interest on the debentures at any time or from time to time for a period not to exceed 20 consecutive quarters with respect to each deferral period, provided that Ford may not defer the payment of interest beyond the stated maturity of the debentures. If Ford defers the payment of interest on the debentures, the trust will defer the quarterly distributions on the preferred securities for a corresponding period. In this case, distributions on the preferred securities will continue to accrue and will accumulate additional distributions thereon at an annual rate of 6.50%, compounded quarterly from the relevant payment date for such distributions. “

This is a Ford Cumulative Convertible Preferred Stock. It give 6.5% of $50 or ($50 times 6.5% = $3.25 per share) on a $50 per share of Ford Cumulative Convertible Preferred Stock.

What is Cumulative?

Investopedia explains Cumulative Preferred Stock this way; “A preferred stock will typically have a fixed dividend yield based on the par value of the stock. This dividend is paid out at set intervals, usually quarterly, to preferred holders. If a company runs into some financial problems and is unable to meet all of its obligations, it will likely suspend its dividend payments and focus on paying the business-specific expenses. If the company gets through the trouble and starts paying out dividends again, it will first have to pay back all of the dividends that are owed to preferred share holders.”

Ford Motor Company is recovering from bad times where they had to suspend dividend payments. They will have to pay dividends on this issue since April 2009. They can defer dividend payments up to 20 quarters. It has been deferred 6 quarters to date. So they owe whoever owns a share of this preferred, $4.88. If they pay in the next quarter and you buy the stock at the current price of $48.66 per share, your current yield will be 6.67% and your extra onetime yield would be 10.02%. In any event, they must pay within the next 14 quarters or 3.5 years.

What is Convertible?

Investopedia explains Convertible Preferred Stock this way; “Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Most convertible preferred stock is exchanged at the request of the shareholder, but sometimes there is a provision that allows the company (or issuer) to force conversion. The value of convertible common stock is ultimately based on the performance (or lack thereof) of the common stock.

This Preferred Stock is also convertible into Ford Common Stock. According to the prospectus, you can convert one share of Preferred Stock into 2.8249 Shares of common stock anytime you want. The formula for this is: 2.8249 Ford Motor Company Common Stock Shares Times $17.70 = $50.000073. In our example, Ford 6.65% Preferred Stock was selling at $48.66. By buying the preferred stock then converting, you would make about $1.34073 per share. This must be done before the close of business on January 15, 2032, at which time the speculator cannot convert preferred stock into common stock. The common stock closed at $12.49 on Sept. 17, 2010. 2.8249 times $12.49 is only $35.283001. That is $13.376999 less than what the preferred stock is worth now. So a conversion at this time would be “out of the question.”

Looking at Your Options!

But hold it! Remember we said that there is $4.88 in dividends in arrears. So the preferred stock at the moment is really worth $53.54. That is $3.539927 more than the conversion price. To get that, all you have to do is buy the preferred stock and wait. Then hope to sell it at $50 one day. Even if you sell it at the price you bought it after the dividend is paid, you may come out ahead (provided that you can cover your commissions.)

You can read the Ford Motor Company Capital Trust II 6.50% Cumulative Convertible Trust Preferred Securities (liquidation preference $50 per preferred security) Prospectus. Just click on the link below;

http://www.sec.gov/Archives/edgar/data/37996/000095012402000142/s66289b4e424b4.htm#025

After reading all of this, do you think this would be a good long term speculation?

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