Monday, November 17, 2008

The Warren Buffett Way: Chp 6 Part 4: Fixed-Income Marketable Securities

Convertible preferred stocks are securities that have equity and bond like characteristics. Convertible preferred shares have higher yields and significantly more certainty of dividend payments compared to a company's common shares. Due to these attributes and the fact that they can be converted into common shares, convertible preferred shares are typically priced at a 20 percent to 30 percent premium to the company's common shares.

Since convertible preferred shares can be redeemed into common shares, if the common shares price rises, then the convertible preferred shares price will also rise. If the common shares price falls, the higher yields on the convertible preferred shares will reduce the extent of preferred shares price decline. A theoretical price floor for the convertible preferred shares, would be the price at which its yield would approach that of a similar nonconvertible bond.

Buffett has invested in quite a few convertible preferred shares of various companies. In the next few posts we will examine Buffett's investments in the convertible preferred shares of Salomon, Champion International, USAir and American Express.

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