A Rare Gem in the Energy Sector: PG&E's Preferred Stock Offers 6.9% Yield with a Margin of Safety

The energy sector has long been a haven for income-seeking investors, but few instruments currently offer the combination of stability and yield found in Pacific Gas and Electric Company’s (PG&E) 4.50% First Preferred Stock (PCG.PRH). With a declared dividend of $0.2812 per share, payable on August 15, this security now yields 6.91%—a compelling premium to its original coupon—and trades at a steep discount to its liquidation value. For portfolios seeking income in a rising-rate environment, this preferred stock presents an opportunity to lock in above-average returns with a tangible safety buffer.

Yield Attractiveness: A 6.9% Dividend in a Low-Yield World

The recent dividend declaration of $0.2812 per share underscores the stock’s income appeal. With four quarterly payments of $0.2812 annually, the total dividend per share reaches $1.125—a figure that, when divided by the current market price of $16.28, yields 6.91%. This yield is nearly double the 3.5% average for investment-grade preferred stocks and far exceeds the 1.6% yield on the 10-year Treasury.

What makes this yield even more compelling is its stability. Unlike common stocks, preferred dividends are contractual obligations, ranking ahead of common shareholders in priority. PG&E’s track record of dividend payments, including its May 22 declaration, reinforces its commitment to income investors. The stock’s cumulative feature—where missed dividends accumulate and must be paid before common dividends—adds further assurance, even in challenging scenarios.

Creditworthiness: A Below-Investment-Grade Risk, But with Utility Stability

PG&E’s preferred stock carries a Ba3 rating (Moody’s) and BB+ (Fitch), placing it firmly in the speculative-grade category. S&P does not rate the preferred stock, but the issuer’s senior debt carries a BBB- rating, suggesting the company’s utility monopoly in California provides a structural advantage.

While the ratings reflect PG&E’s history of bankruptcy and regulatory challenges, its status as a regulated monopoly utility offers a unique defensive trait. Unlike cyclical industries, utilities like PG&E are recession-resistant, with steady cash flows from ratepayers. The company’s $25.75 liquidation preference further bolsters safety: in a worst-case scenario, holders of this preferred stock would receive this amount per share upon liquidation, far above the current market price of $16.28. This $9.47 discount to liquidation value acts as a margin of safety, cushioning against price declines.

Suitability for Income Portfolios: A Hedge Against Rate Hikes

In a rising-rate environment, preferred stocks like PCG.PRH can thrive. Their fixed dividend rates insulate investors from the volatility of floating-rate instruments, while their yields often outperform bonds in the same risk tier. PG&E’s preferred stock, with its 6.91% yield, offers a hedge against the Federal Reserve’s gradual rate hikes, which have pushed short-term Treasury yields to 5.5% but left long-term bonds struggling.

For income-focused portfolios, this security could serve as a strategic anchor. Pairing it with lower-yielding, higher-quality bonds would balance risk and return. The stock’s cumulative dividend structure also makes it attractive for retirees or endowments reliant on steady payouts. While its sub-investment-grade rating requires caution, the discount to liquidation value and PG&E’s regulated earnings model mitigate downside risks.

Risks and Considerations

No investment is without risk. PG&E’s preferred stock is sensitive to interest rate fluctuations—rising rates could depress prices further, though the steep discount to liquidation value limits this risk. Regulatory headwinds, such as California’s evolving energy policies, could also impact cash flows. Investors should monitor the company’s credit metrics and liquidity, which remain stable but not bulletproof.

Conclusion: A Compelling Income Opportunity

At a 6.9% yield and a 36.8% discount to liquidation value, PG&E’s First Preferred Stock offers a rare blend of income and safety in today’s market. While its speculative-grade rating demands vigilance, the utility’s stable cash flows and the embedded margin of safety make this a compelling play for income investors. With dividend payments secured and a path to recovery from past liabilities, this preferred stock could prove a durable addition to portfolios seeking to weather rising rates and uncertain markets.

Act now to lock in this above-average yield—PG&E’s preferred stock is a rare gem in an era of low returns.