PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, February 2018
Preferred stock issuers were
apparently enjoying the Olympics as much as
I was during February. Two new issues were
introduced early in the month, nothing while
the Olympic torch was lit, then one new
issue after the closing ceremonies.
More likely, issuers are contemplating the
higher dividends that they are now going to have
to pay today’s preferred stock buyers, as
increasing interest rate pressure has finally
built up to the point of providing a meaningful
income increase to preferred stock investors.
February’s new issues
February’s three new preferred
stocks are offering an average annual dividend
(coupon) of 7.2 percent. Here are the three new
issues introduced during February for the
consideration of preferred stock investors.
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.
A special note regarding
preferred stock trading symbols: Annoyingly,
unlike common stock trading symbols, the format
used by exchanges, brokers and other online
quoting services for preferred stock symbols is
not standardized. For example, the Series A
preferred stock from Public Storage is “PSA-A”
at TDAmeritrade, Google Finance and several
others but this same security is “PSA.PR.A” at
E*Trade. For a cross-reference table of how
preferred stock symbols are denoted by sixteen
popular brokers and other online quoting
services, see “Preferred
Stock Trading Symbol Cross-Reference Table.”
There are currently 122 high
quality preferred stocks selling for an average
price of $24.92 (February 28), offering an
average coupon of 5.52 percent and a current
yield of 5.53 percent. And 58 of these high
quality issues are selling below their $25 par
value. By high quality I mean preferreds
offering the characteristics that most
risk-averse preferred stock investors favor such
as investment grade ratings and cumulative
dividends.
There are now a total of 894 of
these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying
new shares for wholesale
Note that PPNSP from 1347
Property Insurance Holdings (PIH) is still
trading on the wholesale Over-The-Counter
exchange (as of February 28). This is a
temporary OTC trading symbol until this security
moves to the NASDAQ exchange, at which time it
will receive its permanent symbol.
But there is no need to wait;
during a period of relatively 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).
Those who have been following
this strategy of using the wholesale OTC
exchange to buy newly introduced shares for less
than $25 are more able to avoid a capital loss
as prices start to drop (if they choose to
sell).
Your broker will automatically
update the trading symbols of any shares you
purchase on the OTC. PPNSP will become PIHPP.
About
the new issues
February’s three new issues have
a few things in common. They all offer
fixed-rate, cumulative dividends, are unrated,
trade on the NASDAQ Global Market exchange and
have a $25 par value. But these three securities
differ in several important ways as well.
PPNSP/PIHPP from 1347 Property
Insurance Holdings is a traditional preferred
stock, the company’s first income security. PIH
is a holding company, selling homeowner’s and
fire insurance throughout Louisiana, Texas and
Florida as Maison Insurance (a disaster prone
geography). PIH is a small company, with a $41
million market cap and spotty financial results.
PPNSP/PIHPP raised $16 million, about 40% of the
company’s total value. PIH incorporated in 2012
and completed their IPO in 2014.
SOHOK is an Exchange-Traded Debt
Security from Sotherly Hotels LP (SOHO), the
third income security issued by the company in
eighteen months (the other two being traditional
preferred stocks). ETDS’ are bonds recorded on
the company’s books as debt (rather than as
equity, as in the case of preferred stock). As
debt, the obligation to pay the interest on
these bonds is cumulative. As bonds, ETDS’ are
often seen as having lower risk than the same
company’s preferred stock shares. ETDS are very
similar to preferred stocks and are often listed
on brokerage statements as such. SOHOK becomes
callable on February 15, 2019, a year after its
introduction. SOHO is a property REIT
specializing in hotel properties throughout the
southern United States.
NEWTI from Newtek Business
Services Corporation (NEWT) offers a 6.25
percent coupon and matures on March 1, 2023.
Newtek is incorporated as a business development
company, specializing in the debt and equity
financing of small businesses. NEWTI is an ETDS
raising $50 million for the company, $35 million
of which is being used to redeem the company’s
NEWTL baby bond (7.0 percent coupon) on March
23, 2018. This refinancing maneuver saves NEWT
about $262,500 per year in interest expense.
Sources: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com. Prospectuses
PPNSP/PIHPP,
SOHOK,
NEWTI
Tax treatment
The tax treatment of the income
you receive from income securities can be a bit
confusing, but it really boils down to one
question – Has the company already paid tax on
the cash that is being used to pay you or not?
If not, the IRS is going to collect the full tax
from you; if so, you still have to pay tax, but
at the special 15 percent rate.
With that rule in mind, here is
how the tax treatment of February’s new issues
plays out.
Companies incorporated as REITs
are required to distribute at least 90 percent
of their pre-tax profits to shareholders. Doing
so in the form of non-voting preferred stock
dividends is the most common method of complying
and because these dividend payments are made
from pre-tax dollars, dividends received from
REITs are taxed as regular income (i.e. they do
not qualify for the special 15 percent dividend
tax rate).
Interest that a company pays to
those loaning the company money is a business
expense to the company (tax deductible), so the
company does not pay tax on the interest
payments it makes to its lenders (i.e. interest
payments made to lenders are paid with pre-tax
dollars). Since Exchange-Traded Debt Securities
are debt (SOHOK, NEWTI), ETDS shareholders are
on the hook for the taxes. Income received from
ETDS’ is taxed as regular income.
Lastly, if a company pays your
preferred stock dividends out of its after-tax
profits, the dividend income you receive is
taxed at the special 15 percent tax rate. Such
dividends are referred to as “Qualified Dividend
Income” or QDI. QDI preferred stocks are often
seen as favorable for holding in a
non-retirement account due to the favorable 15
percent tax treatment. Looking at the Status
column in the above table, dividends received
from PPNSP/PIHPP are a distribution of the
company’s after-tax earnings and are therefore
designated as being Qualified Dividend Income
(see prospectus for exceptions and conditions).
In
Context: The U.S. preferred stock marketplace
To keep inflation in check, many
are expecting the Federal Open Market Committee
to continue increasing the federal funds rate at
their March 20-21 meeting. For preferred stock
investors, upward pressure on interest rates
finally reached a tipping point with the signing
of the Tax Relief and Jobs Act on December 20,
2017, delivering a long-awaited income boost to
today’s preferred stock buyers.
Interest rates and the prices of
fixed-returned income securities move in
opposite directions – rates up, prices down.
Take a look at what U.S. preferred stock prices
have done since the beginning of last year.
The lower prices that come with increasing
interest rates boost portfolio yields for income
investors.
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, 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.
Moving down the risk scale, the
next chart shows the dramatic increase in
current yield realized by today’s preferred
stock buyers when compared to the yield earned
by those investing in the 10-year treasury note
or 2-year bank Certificates of Deposit.
U.S.-traded preferred stocks are currently
returning an average current yield of 6.7
percent (blue line) while the annual return
being offered to income investors by the 10-year
treasury is 2.9 percent and that of the 2-year
bank CD is a meager 2.3 percent.
For comparison, I have set the
Yield column in the first table above to show
the current yield of the new February preferreds
on February 28. It is into this marketplace that
February’s new issues were introduced.
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