I think its a great buy, I purchased at 10.28 and 10. Waiting to make another entry in the 9's. I am a bit worried about what might happen with TARP 2. There are mixed signals regarding cutting of the preferred divided. Does anyone know how to calculate the impact on the yield if they cut BAC or C's? What are your thoughts? Thanks!
I don't have time to model every holding in PGF, but a (grossly) simplified discounted cash flow model suggests PGF is EXTREMELY cheap by almost any standard. Consider the following:
Assume 1. PGF can be approximated by a single preferred security issued a year and a half ago in a 5% (treasury) interest rate environment 2. A 100 bps spread existed at the time of issuance 3. The dividend is fixed and non-cumulative 4. The face value is $25
These assumptions get you to a present value (price) of $25 and dividends of $1.50 / year (not to far off from what PGF actually looked like). In order to get to yesterday's closing price of $9.81, the spread would have had to increase to about 12% (also roughly consistent with what we're seeing with PGF's yield today). Keep in mind that all else being equal (i.e. if the spread hadn't gone up so much), the lower treasury interest rate environment would have caused PGFs value to go well above the initial price of $25.
Using these (simplifying) assumptions, the market is pricing in that roughly (1) 70% of these preferreds will never be paid again, or (2) all dividends will be suspended for over a decade and then resume, or (3) any combination therein.
I'd be happy for someone to challenge these numbers if you've think I've made a mistake, or to point out how my simplifying assumptions have seriously violated any real conditions.
But, I think the reality is that the difference between "risk" and "uncertainty" is causing this ETF to trade at unjustifiably low levels. "Risk" is when a probability distribution is known for certain outcomes, whereas "uncertainty" is when a probability distribution is unknown (e.g. because the situation is unprecendented and lies in the hands of policy makers). Investors are naturally risk averse, but can at least enter the market and price securities accordingly. Uncertainty, on the other hand, scares investors out of the market completely, depressing prices below any level that a reasonable "risk" distribution approximating that uncertainty would ever suggest. I believe PGF is a "strong buy" at these levels EVEN IF the government comes in and changes the game...