Wells Fargo’s New High-Yielding Fixed-to-Floating Preferred is Worth Considering

December 23rd, 2013 by

wells fargoFixed-to-floating-rate preferreds give investors the opportunity to lock in a fixed interest rate for a defined period of time, followed by a floating interest rate thereafter.  Typically, the preferred stock will switch from a fixed to a floating rate on its first stated call date.  Earlier this month, Wells Fargo issued a fixed-to-floating-rate preferred, the details of which I would like to share below:

 

To see a list of high yielding CDs go here.

 
  • The newly issued preferred stock trades under the ticker WFC-PR.  Depending on the website or broker you use to find quotes, the ticker may vary (WFC prR, WFC/PR, WFC.PR, and WFC-R are other possibilities).
  • The fixed rate is 6.625% of the $25 liquidation preference/call price.  This translates into a $1.65625 annual dividend.  According to the prospectus, the Series R preferred’s dividend is eligible for preferential dividend tax rates.  The fixed rate will expire on March 14, 2024.
  • Beginning on March 15, 2024, dividends will accrue at an annual rate equal to 3-month LIBOR plus 3.69%.
  • Dividends will be paid quarterly in March, June, September, and December.
  • Dividends are noncumulative.  Considering Wells Fargo continued to pay dividends on its common stock throughout the financial crisis, and considering the company’s too-big-to-fail nature, I am not very concerned about Wells Fargo failing to pay a dividend on its preferred stock at some point in the future.
  • Shares are callable at $25 beginning on March 15, 2024 and on any dividend payment date thereafter.  In the event of a “regulatory capital treatment event” (described in the prospectus supplement), shares are also callable prior to March 15, 2024.

When considering whether shares of Wells Fargo’s Series R preferred are right for you, keep the following in mind:

  • Even when trading slightly above par, the high fixed-rate dividend allows investors to still collect attractive yields.
  • In 2024, should interest rates be substantially higher than they are today, there is a good chance Wells Fargo will call the preferred rather than pay the floating rate.
  • In 2024, should interest rates not be substantially higher than they are today, it is possible for shareholders to end up stuck with a preferred stock that adjusts to a lower yield and experiences share price depreciation.
  • The good news for investors who fear both inflation and deflation is that in addition to a floating rate, the Series R preferred has a rate floor of 3.69%.

Finally, for investors less familiar with Wells Fargo, the following three slides from its December 10, 2013 presentation at the Goldman Sachs US Financial Services Conference may be helpful:

Wells Fargo Reach

Revenue diversificationPosition in various markets

 

More from The Financial Lexicon: 

The 5 Fundamentals of Building a Retirement Portfolio

Options Strategies Every Investor Should Know

 

 

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