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Fridson's "Preferred" Favorites in Financial Services

·3 min read

Dividend expert Marty Fridson overs a wide range of complex securities meant for experienced income investors. Here, the editor of Forbes Fridson Income Securities Investor looks at two preferred issues from financial services firms.

Brighthouse Financial, Inc. (BHF) is a major U.S. provider of annuities and life insurance. The company is one of the nation’s largest life insurers.

BHF was created by MetLife (MET) in August 2017 in line with MET’s business objective of separating a substantial portion of its U.S. retail life and annuity business from the main company.

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Brighthouse has strong insurance subsidiary claims-paying ratings, namely, Moody’s, S&P, Fitch, and A.M. Best ratings of A+, A3, A, and A, respectively.

The bank reported 4Q 2020 adjusted net income of $272.0 million or $3.03 per share, easily beating analysts’ $2.73 estimates. Moreover, adjusted net income advanced 23.2% from a year earlier. Adjusted operating revenues of $2.54 billion also topped expectations, helped by continued solid sales growth in the annuities and life businesses.

We are recommending the Brighthouse Financial, Inc.; 6.75% Fixed Rate, Non-Cumulative Perpetual (BHFAO). This preferred is callable at par, on or anytime following the 06/25/25 call date. Dividends on this preferred issue are qualified and taxed at the 15%-20% rate.

This investment is suitable for low- to medium-risk taxable portfolios. Despite the Ba1 preferred rating by Moody’s, we are positively disposed, given the ‘A’ category claims paying ratings at BHF’s insurance subsidiaries. Buy at $27.75 or lower for a 6.08% current yield and 3.99% yield to call.

CNB Financial Corp. (CCNE) is a community bank holding company with $4.5 billion in total assets, serving markets in northwestern Pennsylvania, central Ohio, and Buffalo, New York.

CCNE has 45 full service banking offices and a non-bank financial services subsidiary that offers personal loans for auto purchases, bill consolidation, education and home improvements.

The company provides commercial and industrial banking services; consumer lending; credit card products, including merchant processing; treasury services; private banking; and wealth management.

CCNE reported 4Q 2020 adjusted net income of $13.8 million or $0.75 per share, surpassing analysts’ $0.57 estimates. Revenues of $48.1 million were also well ahead of analysts’ expectations.

Last year was marked by a considerable increase in loan loss provisions, reflecting the economic challenges that CNB’s borrowers have faced. Our expectation is that the level of provision in 2021 will ease towards more normalized levels.

We are recommending the CNB Financial Corp.; 7.125% Fixed Rate, Non-Cumulative Perpetual (CCNEP). The preferred issue is callable at par on the initial 06/25/25 call date or any dividend payment date thereafter.

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Dividends on this preferred issue are qualified and taxed at the 15%-20% rate. The investment is suitable for medium- to high-risk taxable portfolios. Buy at or below $27.25 for a 6.54% current yield and a 4.91% yield to call.

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