Allstate Stock: Obscure Niche Pays Out 6.1% Yield
November 30, 2017
Earn a 6.1% Yield from Allstate Stock?
In a world of rock-bottom yields, this obscure niche offers the last source of real income: preferreds.
In yesterday’s column, I highlighted these investments to new readers. Preferred shares work like a kind of stock/bond hybrid, trading distribution growth in the future for a bigger yield up-front.
That can make sense for retirees who need income today. Better still, preferred owners get paid before common stockholders. As a result, these securities tend to be safer, more reliable investments.
One that popped up on my stock screen? Allstate Corp Series D Preferreds (NYSE:ALL-D). You probably recognize the insurance giant’s spokesman, Dennis Haysbert, who pitches the company’s tagline with his deep, reassuring voice (“Are you in good hands?”). And with a fixed, up-front yield over six percent, this preferred series might warren a closer investigation.
For one, Allstate pays out reliable dividends. Since Sears, Roebuck and Co. spun off the company in 1993, management has paid a distribution to common shareholders every single quarter. That kind of long-term track record gives me a lot of confidence in the underlying business.
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Moreover, executives have conservatively financed operations with a sturdy balance sheet. Allstate generates ample cash flow to make interest and preferred dividend payments. In other words, management has lots of wiggle room in the event that business sours for a year or two.
That safety net continues to grow.
Insurers will mostly benefit from the coming wave of higher interest rates. We also see higher profits across the industry thanks to a growing economy, higher premiums, and smarter risk management.
In the case of Allstate, analysts expect earnings to grow at a mid-teen annual clip over the next five years. For regular stockholders, that means bigger dividends. For preferred owners, higher profits increase the safety of our income stream.
Hurricane losses could clips earnings. Early numbers, though, suggest these property claims will only clip profits for a quarter or two. Those losses likely won’t have any impact on stakeholders with the highest claims to the business.
These Allstate preferreds comes with one issue, though: unlike “plain Patty” stocks, preferreds usually come with a call date. After this point, issuers have the right to buy back their shares.
This often happens after a big drop in interest rates. Businesses will redeem their old series and sell new issues at a lower yield. Owners receive the par value for their shares, but it means their lucrative income stream can dry up.
In the case of these Allstate preferreds, that could become an issue. Management has the right to redeem these shares at any time after April 2019. Holders will receive $25.00 per unit, regardless of what they might have actually paid for their position.
Will executives exercise this right? That depends on market conditions at the time. If interest rates stay where they are right now, I wouldn’t be shocked to see management redeem these issues.
In the meantime, however, preferred owners get to collect a safe six percent yield. And given the shortage of income sources out there, that makes these preferreds an interesting idea to check out further.
