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Sizing Up The General Motors (Preferred) Stock IPO

November 21st, 2010 1 comment

General Motors just went public last week in a big hoopla of an IPO, in a dramatic return to the public markets only 18 months after the company went bankrupt. Well, it’s not the same company because the new one is called ‘General Motors Company’, while the bankrupt entity was called ‘General Motors Corporation’.

While there is a lot of coverage of the common stock, there was almost no discussion about the preferred stock. So, this post will cover the details about the preferred stock. We talk a lot about preferred stocks on this site and how they can enhance your portfolio, so I thought it would be a good idea to cover it.

To summarize it quickly, here are the key details about the preferred offering:

  • Symbol: GM-B
  • Type: Mandatory Convertible Preferred (12/2013 date)
  • Offering Price: $50 (common stock was $33)
  • Coupon Yield: 4.75%

Unlike other convertible preferreds, GM-B is a mandatory preferred, meaning that on December 1, 2013 it will convert to common stock if the holder didn’t otherwise exercise earlier. Given the specifics about its conversion, it is simple to understand the return profile for this security. Here are the possible scenarios and how the return profile looks compared to the common stock:

Common Versus Preferred

If on December 1, 2013, the common stock trades at:

  1. < $39.6 ==> Preferred holders lose/gain capital inline with common holders, but are ahead by the interest payments of 4.75%/year that were collected.
  2. $39.6 to $50 $44.99 ==> Preferred holders earn more than common holders, ending about even at $50.
  3. > $50 ==> Preferred holders give up some capital gains even after factoring in the interest payments.

The outcomes above are simplified because the return profile only applies on the end date. For dates earlier than 2013, the conversion ratio offers more common stock to compensate for the lower interest payments (as time goes on, the amount of common stock goes down to compensate for the interest payments made).

The preferred therefore has some downside protection at the expense of giving up some upside if the common stock does very well.

How To Play It

The preferred stock will likely appreciate less than the common since the conversion rate starts off low and increases over time. This will encourage holders to keep it longer term. If the common stock doesn’t perform that well, the interest payments offer the ability to salvage some return.

As far as attractiveness, the 4.75% yield doesn’t entice me because other preferreds are available at higher interest rates. Also, the common stock doesn’t interest me that much either since I don’t think that the automobile market will recover that quickly and I don’t think that GM has recovered fully to become a very competitive player in the market.

However, one way to play this would be to purchase the preferred if it sells off significantly below face value. This would offer the ability to get an effectively higher yield while at the same time getting all the upside that the common offers.

Categories: Investing Tags: ,