As noted by our reader SteveA, along with other readers, the new Unum Junior Subordinated Notes due 2058 have begun to trade on the NYSE.
All the details on the issue and the prospectus can be found here. Shares are trading right around $25 now. This is a large issue of 12 million shares plus another 1.8 million shares for overallotment.
We will have no personal interest in these baby bonds as we simply are not buying issues with maturity dates this far out–just too much interest rate risk right now. This doesn’t mean the issue is bad–just that it doesn’t fit with our current strategy of investing (which no doubt will change at some point in the future).
We do note that the interest on these baby bonds can be deferred for periods of up to 5 years without being a default–we have NEVER liked these provisions. Is it likely to happen? NO–but who knows over the course of 40 years.
Note that the INSW-A shares are now trading. At the moment, the current price is around the 22.40 range. Not a good indicator IMHO. Also, the company that INSW spun off from in 2016, Overseas Shipholding Group, went bankrupt in 2012. As much as I would have liked buying this, I think the risk level is just a tad to high at this time.
My target duration is to hold this investment is 4-5 years assuming interest rates don’t spike up very high. Up until this year, my investment strategy was ETF or mutual funds. I got tired of subpar performance for the performance of ETF’s like PFF who had a rate of return of about 3.5% per year over the last 3 years. My targeted individual preferred is investment grade companies, call protected for the the next 4-5 years, and paying on average – 6%. So for me, this is a good opportunity. Yes, I would not be happy with 5 year deferral but could live with it, if rates stay reasonable.
Here are other risk(s) to consider, the common stock of UNUM has NOT done well over the last `12 months. The consensus price of the common stock is about 30% undervalue. Their long term care insurance segment is not doing well ( like GE and most others offering long term care). They have a shareholder class action suit. The P/E on the common stock is about 8.6 which is quite low. Yes, it’s a member of SP500 and investment grade debt but this is not without some risks. My plans are about 6.5% of my entire preferred portfolio for this particular offering.
Tim:
Thank you for this site and all of the help you give us.
Regarding your comment about a 5 year deferral of dividends, I am less fearful of a 5 year deferral of dividends than I am of a non-cumulative dividend.
Jim
Hi Jim-Thanks for you kind words. Technically since it is a bond it is non-cumulative, but under the terms of the deferral they accumulate (clear as mud) . Generally if an issue like this were to go to deferral they are a step from bankruptcy.
The 5 year deferral for my sake anyways, is basically the least important of the merits in deciding if this is a purchase. Anybody remember AES-C trust issue that was called a year ago, and was issued in late 1990s? It had the same mechanism and this $50 par issue in early 2000s traded under $5 in early 2000s as people were worried AES might go down with Enron. It didnt, and not once did AES-C ever miss a payment despite the price collapsing 95%. It was redeemed at par last year. There are several oldie trust preferreds with 5 year deferrals that are still outstanding that never have execised the clause. Other events must happen before they can even do this anyways.