A Safe 12.6% Yielder To Help Save Income Investors From The Dark Side

2015 was a very tough year for high yield. Income investors were hit by the sell-off in several sectors including energy, shipping, REIT's, limited partnerships and BDC's. It may have felt as if your high yield portfolio was taking superlaser fire from the Death Star. NGLS-PA is a cumulative preferred issue for Targa Resource Partners (NGLS). This article will show that NGLS-PA is a safe issue despite the lofty yield.
NGLS-PA is a par $25 cumulative preferred unit with a 9% coupon. Distributions are paid monthly and NGLS-PA now yields 12.6% at a recent price of $17. The company has the option to call NGLS-PA at par starting on 11/1/2020. If NGLS-PA is not called by 11/1/2020, the coupon will change from a fixed rate of 9% to a floating rate of 7.71% plus one month LIBOR. One month LIBOR is currently only 0.42%, but most investors expect interest rates to rise substantially by 2020. Even a Jedi Knight should be afraid of what a sharp spike in interest rates can do to perpetual preferred stocks. Fortunately, the fixed to floating rate feature of NGLS-PA offers a protective shield against this interest rate risk. See prospectus for additional details.
The acquisition of NGLS by Targa Resources Corp. (NYSE: TRGP) is expected to be completed on 2/17/2016 (See page 5 of the company's January 2016 Investor Presentation). NGLS-PA will remain outstanding as an obligation of TRGP. The merger will be beneficial to NGLS-PA holders by reducing leverage (See page 26 of the... Read more