PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, November 2019
Interest rates and the market prices of existing income
securities (preferred stocks and bonds) typically move in opposite
directions (rates up, prices down). But since the Fed started raising
rates last August, the market prices of U.S.-traded preferred stocks
have defied gravity by continuously increasing right along with the
upward rate pressure.
That finally changed during November. During the month, the
average market price of U.S.-traded preferred stocks finally succumbed
and fell by $0.32 per share, ending the month at $25.77. This price
drop pushed up the average current yield to today’s buyers by 0.048
percent, now at 6.5 percent.
November’s new issues
November’s
twelve new preferred stocks are offering an average annual dividend
(coupon) of 6.0 percent, an average current yield (which does not
consider reinvested dividends or capital gain/loss) of 6.0 percent and
an average Yield-To-Call (which does consider reinvested dividends and
capital gain/loss) of 5.8 percent (using November 29 prices).
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 and “PSA.PA” at Seeking Alpha. 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 126 high quality preferred stocks selling for an average
price of
$25.77 (November 29), offering an average current yield of 5.3
percent.
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
is now a total of 938 of these securities trading on U.S. stock
exchanges
(including convertible preferred stocks).
About the new issues
SACC
is an unrated Exchange-Traded Debt Security from Sachem Capital Corp.
(SACH). As bonds (recorded on the company’s books as debt), ETDS’ often
offer a lower risk profile than the same company’s preferred stock
(equity). Typically, ETDS’ become redeemable, at the option of the
issuer, five years after they are introduced and mature several decades
in the future. SACC, however, is a bit unusual in that it becomes
redeemable in November 2021 and matures in December 2024 (shares will
be purchased back from shareholders at that time for the bond’s par
value, $25.00 per share). SACH is a real estate finance company,
offering mortgage loans to borrowers primarily on the east coast. The
company was founded in 2010 and is headquartered in Branford,
Connecticut.
PSA-J
is a 9 million share traditional preferred stock from Public Storage,
Inc. (PSA) paying 4.7 percent cumulative dividends. According to the
prospectus, the proceeds from this offering will be used for various
purposes, “…including the redemption of our preferred shares.” With the
introduction of PSA-J, Public Storage has thirteen preferred stock
series currently trading, four of which are redeemable – PSA-V, 5.375
percent, 18 million shares; PSA-W, 5.2 percent, 18 million shares;
PSA-X, 8 million shares, 5.2 percent; and PSA-A, 5.875 percent, 7
million shares. PSA-A is the most likely candidate for redemption here
since (a) the 9 million shares of the new PSA-J is more than enough to
call PSA-A’s 7 million shares and (b) of the four redeemable
candidates, PSA-A’s 5.875 percent coupon offers the largest dividend
expense savings to the company. Public Storage is the highest-rated
property REIT in the U.S. (A3/BBB+). PSA-J pays cumulative dividends,
meaning that if Public Storage misses a dividend payment to you, they
still owe you the money (their obligation to pay you accumulates).
ALL-I
is a 12 million share, traditional preferred stock paying 4.75 percent
dividends from AllState Corporation (ALL). This security is one of two
November preferreds offering double-investment grade ratings (the other
being Public Storage’s PSA-J). Note that ALL-I’s dividends are
non-cumulative, meaning that if the company misses a dividend payment
to you, you’re out; they have no obligation to ever repay the skipped
dividend. The prospectus for this security says that the company may
use the proceeds to redeem “…certain of our preferred stock.” Although
the company has five income securities currently trading, ALL-A (5.625
percent, 10 million shares) is the only one that is currently
redeemable (and has been since June 2018). If AllState uses the
proceeds from the new ALL-I to redeem the outstanding shares of ALL-A,
the maneuver would save the company about $2.2 million per year in
dividend expense.
SYF-A
is a 5.625 percent traditional preferred stock from Synchrony Financial
(SYF) and is the company’s first and only income security. SYF-A raises
$750 million for the company. This security has a speculative-grade BB+
rating from S&P. As with all traditional preferred stocks issued by
banks since July 2010, this security’s dividends are non-cumulative.
The Dodd-Frank Wall Street Reform Act correctly (but unfortunately for
us) determined that bank reserves are not really any good if holders of
a bank’s cumulative preferred stock shares have a claim to the cash, so
all bank-issued preferreds since July 2010 have been non-cumulative.
Synchrony is a $24 billion company founded in 2003 and headquartered in
Stamford, Connecticut.
CIT-B
is from CIT Group (CIT) and pays 5.625 percent non-cumulative
dividends. CIT-B is the bank’s only currently trading income security.
CIT fell victim to the Global Credit Crisis and Great Recession, filing
for bankruptcy in November, 2009 then emerging as a bankruptcy success
story, to the extent there is such a thing, in August 2013. You might
remember a 1960’s wildlife show “Mutual of Omaha’s Wild Kingdom”
starring an aging guy named Marlin Perkins. Marlin would limp after
various animals in the wild, then order his twenty-something co-star to
jump on the critter while Marlin stood by straightening his hair. On
August 12 of this year, CIT Group announced that “…Mutual of Omaha
Bank, a federal savings bank and an indirect wholly-owned subsidiary of
Mutual of Omaha Insurance Company, will merge with and into CIT Bank,
with CIT Bank surviving as a direct wholly-owned subsidiary of the
Company.” The $200 million proceeds from CIT-B will be put toward CIT’s
cash obligations of the merger.
CODI-C
is from Compass Diversified Holdings (CODI), paying 7.875 percent
cumulative dividends. While CODI’s preferred stocks are unrated, its
long-term debt carries a Moody’s A3 rating. Moody’s typically rates a
company’s preferred stock two notches below its debt, implying that
CODI-C would offer a Baa2 rating from Moody’s if the company were to
have the security rated. The proceeds from CODI-C are being used to pay
down debt due in 2025. Doing so converts that debt into equity on the
company’s books. The company has two other preferred stocks trading,
neither of which are currently redeemable. CODI is a $1 billion (market
cap) private equity company established in 2005, investing in middle
market companies.
BXS-A
is a traditional preferred stock from Bancorp South (BXS) with 5.5
percent non-cumulative dividends. BXS-A is the company’s first and only
preferred stock. This security offers Ba1/BB speculative grade ratings
and becomes callable on November 20, 2024. BXS provides banking
services primarily throughout the southern United States. Bancorp South
is a $3.3 billion regional bank founded in 1876 and headquartered in
Tupelo Mississippi.
AEL-A
is from American Equity Investment Life Holding Company (AEL), the
company’s only preferred stock. The dividends paid by this security are
a bit complex. As explained in the prospectus “…until, but not
including, December 1, 2024 at a fixed rate per annum of 5.95% and (ii)
from, and including, December 1, 2024, during each reset period, at a
rate per annum equal to the Five-year U.S. Treasury Rate…as of the most
recent reset dividend determination date…plus 4.322%.” The document
goes on to define various reset periods. The $400 million proceeds from
this security are being used to redeem eight debt securities. AEL is a
$2.7 billion life insurance company founded in 1995.
MS-L
is a traditional preferred stock from Morgan Stanley (MS) offering
4.875 percent non-cumulative dividends and Ba1/BB+ speculative grade
ratings. MS currently has seven preferred stocks trading although the
$484 million proceeds from the new MS-L are being used to redeem all
outstanding shares of MS-G (6.625 percent). This maneuver will save the
company $8.75 million per year in dividend expense. The next Morgan
Stanley preferred stock to reach its call date is MS-E (7.125 percent)
in October 2023. Morgan Stanley is one of the country’s oldest
financial services firms, originally founded in 1924, with a current
market capitalization of $80 billion.
AXQEL/EQH-A
is a 5.25 percent traditional preferred stock from AXA Equitable
Holdings (EQH), the company’s first and only preferred stock.
AXQEL/EQH-A offers a Ba1 speculative grade rating from Moody’s but a
BBB- investment grade rating from S&P. The security’s 5.25 percent
dividends are non-cumulative and the shares become callable in December
2024. AXA Equitable is a $12 billion financial services firm offering
retirement and wealth management services to individuals and business
worldwide. EQH was founded in 1859 and is headquartered in New York
City.
GBLNP/GNL-B
is a traditional preferred stock from Global Net Lease (GNL) with a
6.875 percent cumulative dividend and raised about $86 million for the
company. This is GNL’s second preferred stock currently trading and is
unrated. GNL is a $1.8 billion property REIT, specializing in office
buildings. The company currently has outstanding offers to purchase
fifteen properties for approximately $104 million toward which the
proceeds of the new GBLNP/GNL-B will go.
FTABP/FTAI-B
is an 8 percent traditional preferred stock from Fortress
Transportation Infrastructure Investors LLC (FTAI) paying cumulative
dividends. FTABP/FTAI-B is the company’s second preferred stock, both
of which were issued within the last 90 days. FTABP/FTAI-B uses the
fixed-to-float dividend rate structure, paying 8 percent until the
security’s December 15, 2024 call date. At that time, the dividend rate
will float based on the three-month LIBOR rate plus 6.447 percent. Page
S-13 of the prospectus describes how the coupon of this security will
be calculated in the event the LIBOR becomes unavailable. FTAI is a
$1.5 billion company founded in 2011 and “…owns and acquires
infrastructure and related equipment for the transportation of goods
and people in Africa, Asia, Europe, North America, and South America.”
Sources:
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses:
SACC, PSA-J, ALL-I, SYF-A, CIT-B, CODI-C, BXS-A, AEL-A, MS-L, AXQEL/EQH-A, GBLNP/GNL-B, FTABP/FTAI-B
Preferred Stock Tax treatment
The
2017 Tax Relief Act included a provision aimed at small businesses that
also delivers an enormous benefit to those holding shares of preferred
stocks issued by REITs (which is pretty much all of us). Most small
businesses are incorporated as a Limited Liability Corporation (LLC).
Under this structure, the company’s earnings are passed through to the
owners who then pay the tax on their personal returns. The Act allows
those receiving such income to deduct, right off the top, up to twenty
percent of this “pass-through income.”
But remember that REITs do the same thing as LLC’s – at least 90
percent of a REIT’s earnings are passed to the REIT’s shareholders
primarily in the form of preferred stock dividends; the shareholders
then pay the tax on their personal returns. In other words, preferred
stock dividends received from REITs qualify under the Act’s
“pass-through income” provision and are therefore up to twenty percent
deductible. Such income is reported to you on the 1099 for received
from your broker as “Section 199A” income.
The
tax treatment of the taxable 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.
Unless specified otherwise, traditional preferred stock
dividends, including those paid by partnerships, as pass-through income
or are otherwise paid out of pre-tax profits, are taxable as regular
income; you pay the full tax since the company has not (CODI-C,
FTABP/FTAI-B).
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, taxable dividends received from REITs are taxed as
regular income (PSA-J, GBLNP/GNL-B).
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. Since Exchange-Traded Debt Securities are debt, ETDS
shareholders are on the hook for the taxes. Income received from ETDS’
is taxed as regular income (SACC).
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 (ALL-I, SYF-A, CIT-B, BXS-A, AEL-A,
MS-L, AXQEL/EQH-A).
In Context: The U.S.
preferred stock marketplace
The
following chart illustrates the average
market price of U.S.-traded preferred stocks over the last twelve
months.
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 compares the
average 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
6.5
percent (blue line) while the annual return being offered to income
investors
by the 10-year treasury is 1.8 percent and that of the 2-year bank CD
has turned
the yield curve upside down at 2.2 percent (shorter term money very
rarely
offers a higher return than longer term money).
For
comparison, I have set the Yield column in the first table above to
show the current yield of the new November preferreds on November 29.
It is
into
this marketplace that November’s new issues were introduced.
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