“Rarest Security on Earth: Average 17.2% Yield”

By Travis Johnson, Stock Gumshoe, April 22, 2009

I intended to work some more on Peter Schiff’s picks today, but the level of interest in that piece yesterday was, well, underwhelming — so I’ll work on something else for a bit and come back to our friend Mr. Schiff a bit later.

Today I wanted to take a look at an ad that’s touting the “rarest security on earth” — only eight of these investments exist, according to the folks at High-Yield Investing, and they’re touting some of them and teasing others. There are two that I know she’s been teasing over the past several months, with one of them more or less unchanged and the other up smartly since the last time I wrote about them … but she teases several others, so let’s find out what they all are.

These “rarest securities on earth” are usually called either Income Deposit Securities or Enhanced Income Securities, and they are essentially a hybrid investment that’s made of of half bond, half stock (sometimes the proportions don’t start out at quite 50/50). In buying one of these you’d get one share of the common stock of the company (sometimes the companies have stock that trades separately from these hybrid securities, sometimes they don’t), and a set amount of principal for a bond that has a regular and unchanging coupon payment.

These are designed for income, so the stock portion generally pays a good dividend that can rise or fall based on underlying earnings, and the bond portion pays a steady coupon yield to provide stability and, since bonds are senior to equity, you also get a bit of a lien on the company in the event of something really yucky like a bankruptcy.

This is the table of securities that Pasternak teases for her newsletter as a “good place to start” — though of course, it would be a better place to start if she actually gave you the names and tickers of these mysterious rare securities.

This is the info we get:

Power-generation corp. 15.1%
Packaged-foods maker 14.4%
Hospital owner 15.3%
Bus manufacturer 14.4%
Telecom company 19.0%
Recycling-plant provider 29.1%
Transportation company 13.8%
AVERAGE: 17.2%

Those percentages are the yields for each security — not bad, eh?

So I noted that we’ve looked at a couple of these before — they are the second and fourth ones on that list, the Packaged-foods maker is B&G Foods (BGF is the ticker for this particular security) — I wrote about B&G Foods and this whole concept of Enhanced Income Securities back in January. And the bus manufacturer is New Flyer Industries (NFI in Toronto, NFYIF on the pink sheets) — I wrote about New Flyer back in February. New Flyer has done pretty well in the last couple months, B&G was steady for a while, had a big dip, and now is right back close to where it was when I wrote about it early in the year — and yes, both have big yields in the teens, though the shares fluctuate signfiicantly and the dividends can change, so the actual yield might be a bit different than what’s listed in the table above.

But that still leaves us with five others — what might they be?

The Telecom company teased is almost certainly the only other US-listed security of this type, Otelco (OTT). This is a wireline telecom company that provides phone, data and TV service in five states (Massachusetts, Alabama, Maine, Missouri, and West Virginia). Their “rare security” is a bond of $7.50 principal amount with a 13% yield (pays .975/year) and a share of stock that currently pays a dividend of about .70 a year, so the total annual dividend is about $1.68, paid in quarterly installments of 42 cents.

OTT is not profitable, so the stock dividend will probably be treated as a return of capital, and the coupon interest from the bond would be treated as income — so keep that in mind if you’re comparing these to other high-yield stocks, the after-tax yield may be more important than the nominal yield if you’re investing in a taxable account. The debt portion matures in 2019, but can be called at a small premium in 2012 (the premium drops off over the next couple years) if the company decides that they can borrow cheaper and they’d like to pay you back.

Other than that? They’ve been very steady with their dividend, they carry a fair amount of debt (not unusual for a fixed-asset telecom company), and they’re teensy. For more, go forth and researchify on your own and let us know what you think — I’ve got a couple others to find for you.

The other securities, like New Flyer, are primarily listed in Canada but can also be bought on the pink sheets if you’re careful. Let’s figger out what they are …

Transportation company

This one is Student Transportation of America, a school bus operations outsourcer, more or less — their
Their shares, which they call Income Participation Securities (yet another name for the same thing), are listed at STB.UN in Toronto, and on the pink sheets at SUDRF. Each share of these income securities consists of one common share of Student Transportation (also listed in Canada, at SDB) and C$3.847 principal amount of 14 per cent subordinated notes.

This one has a monthly yield — not surprising, since back in 2005 when this structure looked like it might take off these were being sold to companies as a way to build something like a Canadian Royalty Trust, but with a more appropriate structure for non-Canadian companies or companies that do most of their business outside Canada. As of April the total payment was .09125 Canadian cents per unit (about half dividend/half interest payment), for a total current yield of about 14% if you assume the dividend holds steady.

Recycling-plant provider

This one must be Primary Energy Corp (PRI.UN in Toronto, PYGYF on the pink sheets). This is a cheapo one, the value of the Enhanced Income Security has dropped down to awfully close to the principal value of the bond portion — the company itself is quite small, and operates five power plants in Northern Indiana, mostly plants that recycle energy from industrial processes and excess heat (from steel plants, for example).

It looks like