PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, December 2019
The average market price of U.S.-traded preferred stocks
began 2019 at $23.45 per share and finished at $25.86, delivering an
average capital gain of $2.41, or 10.3 percent, to preferred stock
investors. Adding in the 7.2 percent that January 2019 buyers would
have realized by year-end in dividend cash, 2019 was a spectacular year
for preferred stock investors.
Decembers’s new issues
December’s
ten new preferred stocks are offering an average annual dividend
(coupon) of 5.7 percent, an average current yield (which does not
consider reinvested dividends or capital gain/loss) of 5.6 percent and
an average Yield-To-Call (which does consider reinvested dividends and
capital gain/loss) of 5.2 percent (using December 31 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 K preferred stock from Public Storage is
“PSA-A” at
TDAmeritrade, Google Finance and several others but this same security
is
“PSA.PR.K” at E*Trade and “PSA.PK” 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 122 high quality preferred stocks selling for an average
price of $26.29 (December 31), 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 920 of these securities trading on U.S. stock
exchanges
(including convertible preferred stocks).
About the new issues
SIVBP
from SVB Financial Group (SVB) offers a Moody's investment grade rating
and 5.25 percent non-cumulative dividends. If the security's
underwriters set the dividend rate correctly (5.25 percent in this
case), a newly issued preferred will tend to trade for a market price
very close to its par value ($25 per share here). Setting the coupon of
a new income security is as much art as it is science, but every once
in a while, the underwriters get it very wrong and SIVBP is probably
such a case. SIVBP's market price rocketed to nearly $26 within days of
its introduction, implying that the underwriters probably set this
security's coupon rate too generously; buyers have been very willing to
pay close to $26 to earn 5.25 percent from SIVBP. SIVBP is the
company's only preferred stock currently trading. SVB is a regional
bank founded in 1983 and headquartered in Santa Clara, California.
WRB-F
is an Exchange-Traded Debit Security from insurer W.R. Berkley (WRB),
also referred to as a baby bond. 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. WRB-F is a double-investment grade ETDS paying 5.1
percent interest. WRB is using $250 million of the $350 million raised
by WRB-F to repurchase the 6.75 percent Trust Originated Preferred
Security from W. R. Berkley Capital Trust II, a separate entity. The
trust, in turn, will use the $250 million received from WRB to redeem
the TOPrS shares. WRB is a $13 billion property and casualty insurer
founded in 1967.
HTIA
is a traditional preferred stock from Healthcare Trust, Inc. Be careful
not to confuse Healthcare Trust, Inc. with Healthcare Trust of America,
Inc. While Healthcare Trust of America, Inc. is publicly traded under
the symbol HTA, Healthcare Trust, Inc., the issuer of HTIA, is not
publicly traded (even though their preferred stock, HTIA, is). HTI is a
property REIT focused on acquiring healthcare-related facilities. HTIA
is the company's first and only preferred stock, offering 7.375 percent
cumulative dividends. Cumulative dividends are viewed as lower risk
than non-cumulative dividends since with cumulative dividends the
issuing company still owes you the money in the event of a skipped
payment (their obligation to you accumulates). In other words, while
cumulative dividends can be ‘deferred' they cannot be ‘suspended' (key
words that make a big difference in the prospectus of a preferred
stock).
CUBB
is an unrated ETDS from Customers Bancorp (CUBI) paying 5.375 percent
interest. Be careful when using this symbol to get a quote. CUBB is a
duplicate symbol, with some quoting services showing the price of China
Water Affairs Group Ltd. for this symbol. CUBI has five income
securities currently trading, with the new CUBB being an ETDS and the
remaining four being traditional preferred stocks. The prospectus for
CUBB does not describe any specific intent for the use of the $62
million in net proceeds from this security. However, it does say that
CUBI "…may use a portion of the net proceeds to redeem shares of our
preferred stock once they become redeemable." The first such candidate
would be CUBI-C, a 7.0 percent preferred stock that becomes callable on
June 15, 2020. For a publicly traded regional bank, CUBI is relatively
small with a $746 million market capitalization. The company operates
13 branches primarily throughout the northeastern United States.
T-A
is a traditional preferred stock from AT&T (T) offering 5.0 percent
cumulative dividends and speculative grade ratings from Moody's and
S&P (Ba1/BB+). AT&T has three income securities currently
trading, the other two being Exchange-Traded Debt Securities. T-A is a
fairly large issue at 48 million shares, raising about $1.2 billion for
the company. AT&T's two ETDS' do not become callable for another
couple of years so the prospectus declares that the proceeds from T-A
will be used for ‘general corporate purposes.' A 3 percent common stock
buy-back, expenses related to fighting off the pending Sprint-TMobile
merger (which has been a week away from happening for about three
years) and preparations for 5G will likely see the lion's share of the
proceeds from this new preferred stock.
F-C
is a 6.0 percent ETDS offered by Ford Motor Company (F), the company's
second ETDS currently trading, both of which were introduced during
2019. This security seemed to have had a hard time getting launched.
The underwriters put up the $800 million to purchase these new shares
from Ford on December 11. Understandably anxious to re-sell the new
shares and get their cash back, underwriters typically start doing so
within a few days, but that did not happen here; it seemed to take
forever for the NYSE to assign the F-C symbol. The new shares started
trading on the NYSE twelve days later. Further, as described under
SIVBP above, part of the job of the underwriters is to do their market
research and set the coupon rate at a point where retail buyers are
willing to pay the new security's par value for ($25 in this case). But
when F-C began trading on December 23, it opened at $25.95 and has not
traded below $26 since. The implication is that rather than F-C's 6.0
percent coupon, the underwriters should have set the coupon closer to
5.7 percent. F-C offers an investment grade BBB S&P rating and is
call-protected until December 1, 2024.
GAB-K
is a traditional preferred stock from Gabelli Equity Trust (GAB)
offering 5.0 percent cumulative dividends and an A1 investment grade
rating from Moody's. The proceeds from GAB-K's 4 million shares were
used to redeem all 3 million outstanding shares of GAB's Series D
preferred stock (5.875 percent) on December 26, the maneuver saving the
company $656,250 per year in dividend expense. GAB is a closed-end fund
investing "…in stocks of companies operating across diversified
sectors. It invests in preferred stock, convertible or exchangeable
securities, and warrants and rights. The fund primarily invests in
value stocks of companies across market capitalizations."
PSA-K
is an 8 million share traditional preferred stock from Public Storage,
Inc. (PSA) paying 4.75 percent cumulative dividends. PSA is using the
proceeds from the new PSA-K to redeem all 7 million shares of PSA-A
(5.875 percent) on December 30, saving the company about $2 million per
year in dividend expense. With the introduction of PSA-K, Public
Storage has thirteen preferred stock series currently trading. Public
Storage is the highest-rated property REIT in the U.S. (A3/BBB+).
GGT-G
is a traditional preferred stock from Gabelli Multimedia Trust (GGT)
offering 5.125 percent cumulative dividends and an investment grade A2
rating from Moody's. GGT is a mutual fund focused on equity investing
in the telecommunications, media, publishing, and entertainment
industries. The fund has two preferred stocks currently trading, both
of which offer the same 5.125 percent dividend. GGT has a market cap of
about $200 million. The fund was created in 1994 and is headquartered
in Rye, New York.
MBNKP
is an unrated traditional preferred stock issued by Medallion Financial
Corp. (MFIN) paying non-cumulative 8.0 percent dividends. Medallion
Financial is a bit odd in that it is one of a relatively few
"FDIC-Supervised Depository Institutions". As such, you will not find a
prospectus for this security at the SEC. You can, however, find a
variety of financial and other information about MFIN at the FDIC under
institution ID 57449. MFIN has two income securities currently trading
with MFINL becoming callable on April 15, 2020. Without a prospectus,
it is unknown (at least to me) whether or not the company will use the
proceeds from the new 8.0 percent MBNKP to redeem the outstanding
shares of the older 9.0 percent MFINL, but holders of MFINL shares
should watch for a redemption notice. Having said that, MFINL shares
are still trading well above their $25 par value, which they would not
be doing if market participants felt that MFINL was going to redeemed
any time soon.
Sources:
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectus:
SIVBP, WRB-F, HTIA, CUBB, T-A, F-C, GAB-K, PSA-K, GGT-G
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 (HTIA).
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-K).
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 (WRB-F, CUBB, F-C).
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 (SIVBP, T-A, GAB-K, GGT-G, MBNKP).
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
6.4
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
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 December preferreds on December 31.
It
is
into
this marketplace that December’s new issues were introduced.
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