PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, October 2016
The big news for preferred
stock buyers is that market prices for
U.S.-traded preferred stocks have finally
started to fall for the first time since
last February. As the December Fed meeting
approaches, it is time for preferred stock
buyers to start paying attention.
Eight new preferred stocks were introduced
for the consideration of preferred stock
investors during October. As the month came
to an end, October’s eight new preferred
stocks were offering an average current
yield of 6.4 percent.
Persistent low rates have motivated issuers
to bring 82 new preferred stocks to market
this year. There are now 886 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 – PPLUP from People’s United
Financial (PBCT) - is still trading on the
Over-The-Counter exchange (as of October 31).
This is a temporary OTC trading symbol until
this security moves to the NGS, 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. PPLUP will become PBCTP.
Diversification
October’s eight traditional
preferred stocks are from a diversified field
with five property REITs, a mortgage REIT, a
business investment company and a bank entering
the U.S. preferred stock market.
Seven of the eight new issues offer cumulative
dividends (if the company misses a dividend
payment to you, they still owe you the money;
their obligation to you accumulates). And the
five property REITs represented in October’s
offerings each specialize in a different type of
real estate.
National Retail’s (NNN) F series
was introduced at 5.2 percent. NNN-F is a $300
million offering, the company’s largest yet.
Neither of the company’s other two preferreds
are callable, so the proceeds from NNN-F are
being used to pay off all of the company’s
outstanding credit facility debt (this move
converting debt into equity on the company’s
books).
Bluerock Residential Growth (BRG)
is a relative newcomer to the residential REIT
space, founded in 2008. BRG-D, at 7.125 percent,
is the company’s second offering in less than 90
days, its BRG-C being introduced in July at
7.625 percent.
Public Storage (PSA), the highest
rated property REIT, took advantage of its
A3/BBB+ ratings to issue PSA-E during October at
a miserly 4.9 percent. PSA now has thirteen
preferred stocks trading, four of which were
introduced this year.
PS Business Parks (PSB), an
office REIT, introduced its first new preferred
stock since March 2013 with its PSB-W at 5.2
percent. None of PSB’s other four preferred
stocks that are currently trading are redeemable
so the bulk of the $165 million from this
offering will go to pay down debt.
The last of October’s property
REIT offerings is from Ashford Hospitality
(AHT). Ashford is a property REIT specializing
in hotels. October’s AHT-G raised about $150
million with a coupon of 7.375 percent. These
proceeds will be much more than enough for the
company to redeem all outstanding shares of
their AHT-A (a $50 million issue at 8.550
percent that became callable in September 2009)
and/or a partial redemption of AHT-D (a $200
million issue at 8.45 percent that became
callable in July 2012).
CIM-A is from mortgage REIT
Chimera Investment Corp. (CIM). This October
issue is the company’s first preferred stock
offering and is unrated, but cumulative, at 8
percent.
ECCB is from business investment
company Eagle Point Credit Company (ECC). The
company invests in collateralized loan
obligations. ECCB is ECC’s third offering since
May 2015 (two preferreds plus one
Exchange-Traded Debt security). Both of the
company’s preferreds, offered 17 months apart,
offer 7.75 percent coupons.
Rounding out October’s new issues
is PPLUP (soon to become PBCTP) from People’s
United Financial. Founded in 1842, this is the
company’s only preferred stock offering. Like
almost all new bank-issued preferred stocks
since 2010, PPLUP’s dividends are
non-cumulative, allowing the bank to count the
value of this issue toward its Tier 1 regulatory
reserves. PPLUP’s dividend remains fixed at
5.625 percent for the next ten years, but then
changes to equal the 3-month LIBOR rate
(currently at 0.85789 percent) plus 4.02
percent.
(Sources: Prospectuses
NNN-F,
BRG-D,
PSA-E,
CIM-A,
ECCB,
PSB-W,
AHT-G,
PPLUP/PBCTP CDx3 Notification Service
database,
PreferredStockInvesting.com)
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
qualify 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
People’s United Financial’s PPLUP are a
distribution of the bank’s after-tax earnings
and are therefore designated as being Qualified
Dividend Income (“QDI” in the Status column of
the above table), although there are exceptions
and conditions (see prospectus).
In Context: The U.S.
Preferred Stock Marketplace
So how do the new October issues stack up within
the context of today’s preferred stock
marketplace?
Probably in anticipation of a December rate hike
by the Federal Reserve, the average market price
of U.S.-traded preferred stocks sustained the
much-welcomed decline that actually began during
early-September.
We saw a similar drop in
late-2015 as the Fed was expected to start
raising the federal funds rate in December of
that year – which they did. In response, prices
of income securities finally began trending back
toward normal accordingly, but by mid-February
2016 it became obvious that whatever control the
Fed had over domestic interest rates had been
overstated. By mid-March of this year, the
average market price of U.S.-traded preferred
stocks had returned to where it was the previous
fall ($24.75) and kept right on going, peaking
in mid-August at $26.40 per share.
Since mid-August, the ongoing
price reduction has boosted yields; a welcomed
and long overdue trend for income investors. But
for the year, the average market price of
U.S.-traded preferred stocks closed October at
$25.81, an increase of $1.22 per share this
year, providing an annualized value gain of 6.0
percent.
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 1.9 percent and that of
the 2-year bank CD is a meager 1.5 percent
(currently, tying up your money for an extra
eight years in a 10-year treasury only gets
you 0.4 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 eight new
October preferreds on October 31. It is into
this marketplace that October’s eight new
issues were introduced.
Income versus Value
Investing, Year-To-Date
With an average current yield
of 6.5 percent, plus the 6.0 percent
annualized 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 12.5 percent
(6.0 percent of which is realized in
dividend cash).
After a stagnant summer, those investing in
common stocks, as measured by the S&P500,
saw declining returns over the last two
months. Starting at 2013 at the beginning of
the year, this common stock value index
closed on October 31 at 2126, an unrealized
annualized value gain of about 6.7 percent
plus about two percent in average annualized
dividend yield – a year-to-date annualized
gain of about 8.7 percent for common stock
investors.
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