AT&T (NYSE:T) is a household name, at least for most Americans. This is a very old company that once had the telephone monopoly in the US before anti-trust laws broke up their local telephone companies (The Baby Bells). as they were told).
Since then they have evolved into primarily a wireless company and a broadband company. They are one of the big 3 wireless companies along with Verizon and T-Mobile. They provide cell phone services to their customers and have a large number of their own stores across the country that primarily sell wireless handsets in addition to providing services to their customers. They provide broadband services to businesses and homes.
AT&T’s bonds, preferred stock and common stock
Investors at AT&T have 3 places they can invest in the capital stack They can buy generic Stocks that currently yield 5.66%. I am primarily a fixed-income analyst but I see nothing good about their common stock. It has been a miserable investment for a very long time now.
While the dividend alone isn’t bad, the company’s total returns over the past decade have been pretty bad. In my world, you don’t buy a common stock based on dividends but rather you value a common stock based on the value of the business and how much total return you can expect.
AT&T’s bonds yield about 6% It actually looks like AT&T’s capital stack’s best bet compared to the total return of common stocks and their preferred stocks, which I’ll cover next. Here’s one of AT&T’s best bonds.
AT&T has 2 preferred stocks with the symbols TA (T.PA) and TC (T.PC). These preferred stocks are rated BB+ by S&P and Ba1 by Moody’s which is equivalent to BB+ rating from S&P. What follows is a chart BB+ rated “eligible” dividend paying preferred stock that is either fixed-rate or LIBOR fixed-to-floating rate preferred stock. So that I could fit the list on my screen, I removed a few regional banks that might see downgrades, but doing so didn’t change anything, and otherwise it’s a complete list.
As you can see, TA and TC preferred stocks are at the very bottom of the list with the worst yields of all BB+ preferred stocks In fact, they offer a yield that is 2% lower than ESGRP. Given our current inflation rate, the after-tax yield on TA and TC will be below 5% which means these are not investments you want to make if you want to beat inflation and increase the real value of your portfolio.
Enstar Group (NASDAQ:ESGR) is an insurance company that specializes in what is called “run off” insurance. For example, when an insurance company wants to liquidate they can only do so if they have no future liabilities. So what they do is pay ESGR to take their existing insurance policies off their hands so they can complete their liquidation. Also, some insurance companies simply want to exit one of their lines of insurance business and so they may also offer ESGR to take those policies off their hands. ESGR has done an excellent job in determining the risk of this policy and profit from purchasing the policy from other insurance companies as the following chart shows.
As you can see, it’s pretty much in a straight line since ESGR achieved close to 2500% gains since its inception. It fell during the Great Financial Crisis in 2008, again in the Covid crash and more recently due to massively higher interest rates and better markets. But it is already experiencing a big rally as it did after every previous dip. In their most recent quarter, they earned over $13.00 per share. While I don’t usually recommend common stocks, I would definitely buy ESGR before buying AT&T.
Undervalued ESGRP Preferred Stock
ESGRP (ESGRP) is a LIBOR fixed-to-floating rate preferred stock. As we have seen in the above chart, The current yield of 7.84% is the highest among all BB+ rated fixed-rate and LIBOR fixed-to-floating rate preferred stocks. and the dividend is “qualified“For a lower tax rate. Thus, after-tax ESGRP clearly beats inflation versus AT&T preferred stocks.
Not only is ESGRP’s current yield 2% higher than TA and TC, it also has better call protection as it is not callable until September 2028 whereas TA and TC are callable in less than 2 years. Thus, if we return to a low rate environment, ESGR will not be able to call ESGRP year after year.
Due to ESGRP’s high yield and call expiration dateIt traded as high as $30.00 per share Before the Fed starts raising interest rates. If we go back to a low rate environment, ESGRP should be one of the best performers in terms of total returns (yield plus capital gains).
ESGRP has some interest rate protection in that it floats at LIBOR plus 4.01% if not called. I have no idea where LIBOR might be then but ESGRP’s yield at current LIBOR would rise to 10.25% from the current 7.84%. And if LIBOR drops from 5.2% to 3.2%, you’ll still see yield gains. AT&T preferred stock offers no interest rate protection.
ESGRP actually All BB+ preferred stocks have the best floating rates What can be confusing about the above chart is that the “Float Rate %” column tells you what you would add to LIBOR if the stock traded at par. So even though C preferreds show a higher float rate, because they sell above par while ESGRP sells below par, ESGRP actually yields a better float rate than C at their current price. Same with AHL preferred stock.
So in every way, ESGRP tops the other BB+ preferred stocks and is clearly a vastly better value than the AT&T preferred stocks. It is even undervalued against its sister preferred stock, symbol ESGRO, which has low yields, low call protection and no protection against high interest rates.
And this past month ESGRP fell $1.00 per share while AT&T preferreds rose $1.00 giving us a good entry point for ESGRP and exit points for T.PC and T.PA.
In our Conservative Income Portfolio service I primarily focus on finding under and over preferred stocks, bonds and baby bonds as I have done in this article. This focus allows one to identify the best values in the market and avoid the worst. And sometimes this type of analysis can point to great pair trades where you go long an undervalued security and short an overvalued security. Pair Trade Investing is a way you can invest while eliminating interest rate risk and market risk because you are not going up or down in the market or worrying about where interest rates are going. For those interested, I recently posted an article that I believe is a very useful read for investment ideas that have no market risk or interest rate risk. These risks are usually the biggest risks when you invest in fixed income.
In terms of today’s concepts, it’s pretty simple. AT&T preferred stocks appear overpriced compared to preferred stocks of similar credit quality. Don’t pay extra just because a company is well-known or big. As an alternative to AT&T preferred stocks, we offer one of the best preferred stocks in AT&T’s credit rating category of BB+. Preferred stock holds 7.8% in ESGRP qualified The dividend yield for AT&T Preferred Stock is 5.7%, it offers much longer call protection than AT&T Preferred Stock, and ESGRP offers some of the best interest rate protection in its category. ESGR has been a super performing company since inception and we really like ESGRP. And if you like pair trading, you can consider buying ESGRP and shorting T.PC to eliminate market and interest rate risk.