AEGON, N.V. (ADR) Preferred Stock – $1.5B Redemptions May Create Opportunity for Remaining Issues

AEGON, N.V. (NYSE: AEG  ) , a Dutch insurance company with a $21.7 billion market cap, has four preferred stocks currently trading including one exchange-traded debt security or ETDS. These four securities, three of which are fixed-rate with one floating rate preferred, have cumulative dividends with double investment grade ratings (Baa1/BBB). The fixed-rate securities are offering an average current yield of 6.54%. The floater is a LIBOR-based floating-rate traditional preferred stock and is offering a 4.28% current yield.

Description and History
While AEGON is a Dutch insurance company, the majority of its revenue is derived from its U.S. business where it operates under the Transamerica brand acquired in 1999.

Source: Company 2013 Annual Report, Aegon.com.

The company, headquartered in The Hague, Netherlands, traces its roots back more than 160 years when it first provided Dutch citizens with funds for family burials. Now, AEGON's 23,000 employees staff its global operations, providing a wide range of life insurance, pension, savings and investment products in the U.S., the U.K., the Netherlands, and other countries.

With U.S. equities surging during late-2013, employees of companies that have pension plans offering AEGON funds moved cash into those funds in a big way during the first quarter of 2014. U.S. pension cash inflows to AEGON increased by 43% over the first quarter of 2013.

Source: Q1 2014 Results presentation, Aegon.com.

AEGON just reported its first quarter results on May 15. During its quarterly conference call, CEO Alexander Rijn Wynaendts stressed the company's progress toward lowering its debt saying that: "We will achieve our objective to reach a leverage ratio of 26% to 30% and a fixed charge coverage of 6x to 8x by the end of this year. And as a result, our funding costs will further decrease in 2014, which improves our cash flows and has a positive impact on our return on equity."

Integral to this effort was the recent redemption of two of AEG's capital securities. Redeeming AEV on March 15 (6.875% on 20 million shares) and AEF coming up on June 15 (7.25% on 40 million shares) saves the company $106,875,000 in annual dividend expense.

AEGON's Preferred Stocks
This table itemizes AEGON's three preferred stocks and its single ETDS (AEK, shown in green font), all of which pay quarterly dividends. The preferred stocks reach their next quarterly ex-dividend date on August 27, while AEK's next ex-dividend date occurs a month earlier on July 30.

Source: CDx3 Notification Service database, PreferredStockInvesting.com.

AEH is a traditional preferred stock issued by AEGON in 2005. Due to this security's relatively low 6.375% dividend rate, this security is particularly exposed to the "perpetual ownership trap" (Preferred Stock Investing, Fifth Edition, page 141). Traditional preferreds with a dividend rate of at least 6.5% are generally able to be sold for a capital gain either on the open market or to the issuing company as the result of a redemption; there have only been two exceptions since January 2001 (Preferred Stock Investing, Fifth Edition, page 260). Those holding shares that offer a dividend rate below 6.5%, however, have not been as fortunate. Today's buyers wishing to avoid a downstream capital loss are likely to hold these shares for a very long time.

AEB is a LIBOR-based variable rate preferred stock. Even though AEB's December 15, 2010 call date has long-since come and gone, it is unlikely that AEGON will be redeeming these shares anytime soon. AEB's dividend rate is calculated by "...the greater of (a) three-month LIBOR plus 0.875%, and (b) 4.00%." The current LIBOR is at 0.2273% so AEB is only costing AEGON 4%, well below the average 6.8% current yield being offered by the highest quality preferred stocks in today's market.

AED was introduced at the same time in November 2005 as AEB but with a fixed 6.5% dividend rate. Uncertain as to which direction rates were going to go, AEGON hedged its bet in 2005 by separating this issuance into the LIBOR-based AEB and the fixed-rate AED, a strategy that ended up producing a substantial benefit to the company as AEB has been paying its minimum rate of 4% since early 2008.

AEK is an ETDS. ETDS, while very similar to preferred stocks, are actually bonds that trade on the stock exchange (recorded as debt rather than equity on the company's books). AEK was issued in January 2012 at 8%. Its 20 million shares produced gross proceeds of $500 million to AEGON.

At a well above-par $28.88, shares of AEK expose today's buyers to a $3.88 per share capital loss in the event of a downstream call. Buyers are betting that rates will increase substantially by this security's August 2017 call date, eliminating the company's ability to redeem AEK by issuing a new security at a lower rate at that time.

What's next?
If you feel that AEGON's preferred stocks are consistent with your personal financial resources, goals, and risk tolerance, taking a closer look at AED would be a good place to start your due diligence. The question with AED is the likelihood of a call in the short-term. AED became callable on December 15, 2010 so AEGON can redeem AED at any time. Those paying more than this security's $25 par value will realize a capital loss in the event of such a redemption.

On the other hand, AED offers a 6.5% dividend and is trading close to its $25 par value, its market price having come down about $0.30 per share since May 27. And even though AED is redeemable, the company's redemption of AEV on March 15 and AEF on June 15 reduces the company's cash by $1.5 billion. It seems like if AEGON had the cash on hand to redeem AED it would have. In other words, the $1.5 billion payout to redeem AEV and AEF may have created an opportunity for AED buyers.

While it is not possible to know when, or even if, the company will redeem AED, today's buyers will realize a current yield of 6.44% from a double-investment grade preferred stock with cumulative dividends issued by a company with very low default risk.

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