Published:
September 7, 2007
Countrywide Capital V, 7.00% Capital Securities (NYSE: CFC-PB,
$18.75; CUSIP: 222388209) are preferred shares issued and
guaranteed by Countrywide Financial (NYSE: CFC). A member of
the S&P 500 and Fortune 500, Countrywide is the largest
independent mortgage lender in the country. It operates through
a network of about 1,000 branch offices in all 50 states and
Washington, D.C.
For the past 38 years, Countrywide has provided mainly prime
first mortgages for single-family homes. It also offers home
equity loans, commercial mortgages, subprime home mortgages, and
casualty insurance. Countrywide makes money by servicing its
mortgages and also by selling them to investment banks that turn
them into mortgage-backed securities. It also runs Countrywide
Bank, offering customers CDs, money market accounts, and home
loan products.
Like other mortgage providers, Countrywide's earnings have been
hit hard by reduced demand for mortgage-backed securities.
Falling values for mortgage-backed securities have also
constrained the firm's ability to raise money to provide more
home loans. But in all except a worst-case scenario, CFC's
diverse revenue stream and banking operations should cushion the
blow and help the company pull through the current credit
crunch.
Dividend: This preferred stock pays a $1.75 per
share dividend, distributed in quarterly installments. At the
current share price, the stock yields 9.3%.
As trust preferred shares, the dividends on CFC-PB are taxed at
your ordinary income tax rate, so the shares are best held in a
tax-advantaged IRA or 401(k) type of account.
The shares are currently rated in the lower rung of
investment-grade as Baa3 (Moody's) / BBB+ (Standard & Poor's).
That means they are considered medium quality and dividend
payments are considered reasonably secure for the time being.
They rank as "junior debt," meaning investors have a claim on
the company's assets in case of bankruptcy before either owners
of traditional preferred or common shares.
The shares can't be called until November 2011, so they should
offer an above-average income stream for many years. They don't
mature until November 2036, and that could be extended until
November 2066.
Countrywide does have the right to defer preferred share
dividend payments for up to five straight years before it's
required to sell common shares to pay the dividends. The company
can also defer the preferred share dividend for up to ten
straight years without being considered in default. These
clauses do create additional risk not covered by the
investment-grade credit rating.
As a mortgage lender, Countrywide needs to borrow money to
originate new loans. If dividend payments were deferred,
however, then that could have a devastating effect on the
company's credit ratings and common share price, making it
difficult to raise the capital needed to fund new loans. But on
that note, Countrywide has a stellar dividend record. It has
paid a regular quarterly dividend on its common shares since
1982.
Valuation: When these preferred shares are
redeemed or at maturity, investors will be paid the $25 par
value (barring unforeseen circumstances like bankruptcy or
liquidation). Since you can buy the shares well below that
price, you would be looking at a solid capital gain if you held
them until your principal is returned. In other words, the price
is a bargain.
Bank of America (NYSE: BAC) recently announced the purchase of $2 billion of Countrywide's convertible preferred stock. The capital infusion
has eased concerns about the company's ability to raise enough
money to continue operating. It also sent Countrywide's common
and preferred shares soaring.
Action To Take ---> Despite
the rally, we believe CFC-PB still has room to run, and we are
cautiously optimistic the company will sustain preferred share
dividend payouts at the current rate.
Carla Pasternak
Editor
High-Yield
Investing
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