PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, July 2016
While ongoing high demand for
U.S. income securities has led issuers to
introduce a huge crop of new preferred stock
issues this year, they appear to have taken
a break during July with only five new
securities coming to market.
July’s five new preferred stocks are
offering an average current yield of 6.2
percent for the consideration of preferred
stock investors. There are now 905 of these
securities trading on U.S. stock exchanges.
Note that I am using IPO date
here, rather than the date on which retail
trading started. The IPO date is the date
that the security’s underwriters purchased
the new shares from the issuing company.
Anxious to sell the new shares, underwriters
will generally sell to broker/dealers using
a temporary trading symbol on the wholesale
Over-The-Counter exchange (who, in turn,
sell them to us at retail within a few days
of the IPO date).
Buying New Shares
for Wholesale
Note that the most recently
introduced issue – CITLP from Capital One (COF)
- is still trading on the Over-The-Counter
exchange (as of July 29). This is a temporary
OTC trading symbol until this security moves to
the NYSE, at which time it will receive its
permanent symbol. But there is no need to wait;
during a period of high prices, individual
investors, armed with a web browser and an
online trading account, can often purchase newly
introduced preferred stock shares at wholesale
prices just like the big guys (see "Preferred
Stock Buyers Change Tactics For Double-Digit
Returns" for an explanation of how the
OTC can be used to purchase shares for
discounted prices during a period of high
preferred stock prices).
Your broker will automatically update the
trading symbols of any shares you purchase on
the OTC. CITLP will become COF-G.
Diversification
All five of July’s new issues are
traditional preferred stocks. Two of the five
are from financial institutions – SF-A from
Stifel Financial (SF) and CITLP from Capital One
(soon to become COF-G).
CITLP was the largest July issuance, with its 24
million shares raising about $600 million for
Capital One. Stifel’s SF-A, issued at six
million shares, seems puny by comparison. The
dividends of both of these bank-issued
securities are non-cumulative, allowing the
value of these securities to be counted toward
these bank’s Tier 1 regulatory reserves.
July’s offerings also included three new issues
from property REITS – AHT-F from Ashford
Hospitality (AHT); BRG-C from apartment
developer Bluerock Residential Growth (BRG); and
PSA-D from Public Storage (PSA) for those in
need of a place to put that old couch and lawn
furniture. Ashford’s AHT-F continues a trend
that we have seen this year with new preferred
offerings from hotel REITs.
Tax
Treatment
Dividends paid by REIT preferred
stocks are a pre-tax distribution of the
company’s earnings to shareholders. As a pre-tax
distribution, it is the shareholder who pays the
full tax so dividends received from REITS do not
qualified for any type of favorable tax
treatment (although portions of REIT dividends
are frequently re-classified at tax-time as
capital gains, hence lowering your tax burden in
that manner).
On the other hand, dividends
received from the two new bank preferred stocks
in the above table that have “QDI” in the Status
column are a distribution of the bank’s
after-tax earnings and are therefore designated
as being Qualified Dividend Income, although
there are exceptions and conditions (see
prospectus).
About the New Issues
Ashford Hospitality’s 7.375
percent AHT-F is a 4.8 million share
offering, generating about $116 million for
the company. $75 million of these proceeds
were used to redeem all 3 million
outstanding shares of the company’s AHT-E
9.0 percent preferred stock. Because of the
difference in the size of these two issues,
however, the company’s annual dividend
obligation to shareholders has increased by
$2.1 million, albeit at a lower dividend
rate.
The 4.95 percent offered by Public Storage’s
new PSA-D preferred stock is the lowest
coupon preferred stock ever issued by the
company, demonstrating the strength of PSA’s
A3/BBB+ ratings. Public Storage, by the far
the most prolific preferred stock issuing
REIT, now has twelve preferreds trading. The
company’s highest coupon offering is PSA-Z
at 6.0 percent, but PSA-Z also trades at
about $29 per share, well above this
security’s $25 par value.
BRG-C is Bluerock
Residential’s second new offering within the
last ten months, its only other preferred,
BRG-A, being introduced last October at 8.25
percent. As these two issues are nearly
identical in their terms, the downward
pressure on interest rates that we have seen
over this ten month period is on display
here.
(Sources: Prospectuses
AHT-F,
SF-A,
BRG-C,
PSA-D,
CITLP. CDx3 Notification Service
database,
PreferredStockInvesting.com)
In
Context: The U.S. Preferred Stock
Marketplace
So how do the new July issues
stack up within the context of today’s
preferred stock marketplace?
During the week ending July 17, 2016,
Japanese buyers bought a record-setting
$25.4 billion of U.S. debt, pushing prices
of U.S.-issued income securities to new
highs during the month. Global interest
rates at zero or negative were cited as the
primary driving force, as foreign investors
search for yield (see “Here’s
why 10-year Treasury may still drop below 1%”).
Until alternatives present themselves,
income investors are likely to continue to
see higher than normal prices for U.S.
income securities, including preferred
stocks.
Coupled with the limited success of the
Fed’s efforts to increase the cost of money,
the average market price of U.S.-traded
preferred stocks has increased by $1.68 per
share this year (an annualized value gain of
11.7 percent), including a $0.42 increase
during July.
The data being charted here
is limited to call-protected issues in order
to limit the price distorting effect of an
anticipated redemption.
Beyond ratings, many things affect the
market prices of these securities such as
the proximity to their call or maturity
date, proximity to their next ex-dividend
date, industry and/or overall health of the
issuer (think upstream oil producers),
perceived direction of interest rates,
pending government regulatory or policy
changes, cumulative versus non-cumulative
dividends and tax treatment of dividend
payments. So what we really need to look at
is current yield, which calculates the
average annual dividend yield per dollar
invested (without considering re-invested
dividend return or any future capital gain
or loss). Current yield is a
“bang-for-your-buck” measure of value that
normalizes differences in coupon rate and
price to give us a single, comparable
metric.
While the continuing strong
demand for U.S. preferred stocks can be
attributed to several factors, the next
chart makes it pretty clear that the lack of
attractive alternatives is certainly among
them.
U.S.-traded preferred stocks
are currently returning an average current
yield of 6.5 percent (blue line) while the
annual return being offered to income
investors by the 10-year treasury is 1.5
percent and that of the 2-year bank CD is a
meager 1.4 percent (currently, tying up your
money for an extra eight years in a 10-year
treasury only gets you 0.1 percent over a
federally-insured bank CD).
For comparison, I have set the
Yield column in the first table above to show
the current yield of the five new July
preferreds on July 29. It is into this
marketplace that July’s five new issues were
introduced.
Income versus Value
Investing, Year-To-Date
With an average current yield of
6.5 percent, plus the 11.7 percent annualized
YTD value gain, those investing in U.S.-traded
preferred stocks since the beginning of 2016 are
currently on pace for a total annualized return
of 18.2 percent (6.5 percent of which is
realized in dividend cash).
Those investing in common stocks, as measured by
the S&P500, had a great July. Starting at 2013,
this common stock value index closed on July 29
at 2174, an unrealized annualized value gain of
about 13.7 percent plus about two percent in
average annualized dividend yield – a
year-to-date annualized gain of about 15.7 for
common stock investors.
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