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PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, June 2020
June’s
thirteen new preferred stocks are offering an average annual dividend
(coupon) of 6.8 percent, an average current yield (which does not
consider reinvested dividends or capital gain/loss) of 6.8 percent and
an average Yield-To-Call (which does consider reinvested dividends and
capital gain/loss) of 7.0 percent (using June 30 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 126 high quality preferred stocks selling for an average
price of $25.44 (June 30), offering an average current yield of 5.5
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 928 of these securities trading on U.S. stock
exchanges
(including convertible preferred stocks).
About the new issues
AUBAP
is an unrated traditional preferred stock from Atlantic Union
Bancshares Corporation (AUB) offering fixed 6.875 percent annual
dividends. The dividends of this security are non-cumulative, meaning
that if the issuer misses a payment to you they are not obligated to
make it up to you downstream (common stock dividends are another
example of dividends that are non-cumulative). AUBAP is the bank’s
first, and only, preferred stock offering. AUB has relatively little
exposure to the effects of COVID-19 on its business or that of its
borrowers as only seventeen percent of the bank’s loan volume is held
by businesses in the retail trade, restaurant, senior living, hotels or
health care segments (and none in the energy, cruise or aviation
sectors). AUB is a $1.7 billion (market cap) regional bank serving
Virginia, North Carolina, and Maryland. The bank was founded in 1902
and is headquartered in Richmond, Virginia.
HWCPZ
is a double-investment grade Exchange Traded Debt Security paying 6.25
percent interest from Hancock Whitney Corporation (HWC). HWCPZ is the
first income security issued since March 2019 that is able to meet all
ten of the selection criteria in my book, Preferred Stock Investing,
Fifth Edition (Preferred Stock Investing, Fifth Edition page 132).
ETDS’ are also referred to as baby bonds and are recorded on the
company’s books as debt (rather than as equity, as in the case of
preferred stock). 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. The interest paid by ETDS’, with very few exceptions, is
cumulative, meaning that in the event the issuer skips a payment to you
they still owe you the money (their obligation to pay you accumulates).
In the case of HWCPZ, any unpaid interest also, itself, earns interest
(prospectus page S-16: “Interest not paid on any payment date will
accrue and compound quarterly at a rate per year equal to the rate of
interest on the Notes until paid.”). Hancock Whitney is a $1.8 billion
regional bank headquartered in Gulfport, Mississippi and founded in
1883.
UCBIO
is an unrated, traditional preferred stock from United Community Banks,
Inc. (UCBI) offering 6.875 percent annual non-cumulative dividends.
UCBIO is the bank’s only preferred stock currently trading. As
bank-issued preferred stocks go, UCBIO is a relatively small issue,
raising a net of just under $100 million. As with all bank-issued
preferred stocks introduced since July 2010, dividends must be
non-cumulative in order for the bank to count the value of these shares
toward their Tier 1 Capital reserves. On March 9, 2020 UCBI announced
their acquisition of Three Shores Bancorporation, Inc. (TSHR) and its
Seaside subsidiary. The acquisition expands UCBI’s southeastern
footprint into Florida plus additional client offerings. UCBI is a $1.5
billion regional bank founded in 1950 and headquartered in Blairsville,
Georgia.
ATH-C
is a traditional preferred stock from Athene Holding, Ltd. (ATH). ATH-C
is the third preferred stock issued by Athene in the last twelve
months. ATH-C offers an investment grade rating from S&P and uses
the somewhat unusual fixed-to-float reset rate structure, currently
paying 6.375 percent fixed-rate dividends. While the fixed-to-float
rate structure indicates that the security’s dividend rate will be
fixed until a specific future date, then becomes variable based on some
formula, the “reset” specification used by this security’s rate
structure indicates that there are multiple future dates upon which the
rate will be recalculated. The first rate reset date occurs on
September 30, 2025, then resets repetitively every five years after
that until ATH redeems the outstanding shares (which they are allowed
to do at any time on, or after, June 30, 2025). The formula used to
calculate the dividend rate each time it resets is the then-current
five-year U.S. treasury rate plus 5.97 percent. Also unusual is the
lack of consistency in the rate structure of ATH’s three preferred
stocks. ATH-A, issued on June 5, 2019 uses the fixed-to-float structure
without the reset provision; ATH-B, issued on September 16, 2019, is a
fixed-rate security with no variable rate provision at all while ATH-C
uses the fixed-to-float with reset as described above. Athene is a $6
billion diversified insurance provider headquartered in Bermuda and
founded in 2008.”
SBBA
is an unrated ETDS from Scorpio Tankers, Inc. (STNG) paying 7.0 percent
interest. Typically, ETDS’ have a maturity date that is well into the
future, decades in many cases. SBBA, on the other hand, matures on June
30, 2025. The introduction of SBBA comes on the heals of the maturation
of its previous ETDS, SBNA, which matured on May 15, 2020. An
interesting and rare redemption provision was added to the prospectus
of SBBA. Typically, when/if the issuer redeems the shares they buy the
shares back from shareholders at the security’s par value (usually $25
per share). But the following provision was added to the prospectus of
the new SBBA: “We may redeem the Notes for cash, in whole or in part,
at any time at our option (i) on or after June 30, 2022 and prior to
June 30, 2023, at a redemption price equal to 102% of the principal
amount to be redeemed, (ii) on or after June 30, 2023 and prior to June
30, 2024, at a redemption price equal to 101% of the principal amount
to be redeemed, and (iii) on or after June 30, 2024 and prior to
maturity, at a redemption price equal to 100% of the principal amount
to be redeemed.” In other words, if the company redeems the shares
sooner than expected (between June 30, 2022 and June 30, 2023),
shareholders will receive the security’s par value ($25) plus an
additional $0.25 per share. This provision is intended to motivate
investors in the short-term to purchase these shares when they
otherwise might not. Scorpio transports refined petroleum products
worldwide. The company was founded in 2009 and is based in Monaco.
Public
Storage, Inc. (PSA) has been very busy taking advantage of the current
low-rate environment. Over the last 18 months, the company has issued
five new preferred stocks. In most cases, and in the case of their new
PSA-L, the proceeds from the new issues have gone to redeem the
outstanding shares of older, higher payers saving the company millions
in dividend expense. The new PSA-L is a 20 million share issue with a
coupon of 4.625 percent, raising just under $500 million for the
company. $450 million of these PSA-L proceeds are being used to redeem
all 18 million outstanding shares of PSA-V, a 5.375 percent preferred
stock that became callable on September 20, 2017. This maneuver will
save PSA about $3.4 million per year in dividend expense. PSA, the
highest rated U.S. property REIT (A3/BBB+), is a $33 billion
self-storage company operating through the U.S. and Europe.
AEL-B
is a traditional preferred stock from American Equity Investment Life
Holding Company (AEL), a company that should seriously consider
shortening its ridiculously long name. AEL-B is the company’s second
new preferred stock issued within the last eight months, paying a 6.625
percent non-cumulative dividend. AEL-A, issued just last November, was
introduced at that time with a 5.95 percent coupon. AEL-B’s 6.625
percent coupon illustrates the impact of uncertainty related to the
COVID-19 mortality rate and the corresponding impact to life insurers.
AEL is a $2 billion insurer founded in 1995 and headquartered in West
Des Moines, Iowa.
ASB-F
from Associated Bancorp (ASB) offers a Moody’s investment grade rating
and 5.625 percent non-cumulative dividends. The company has four
preferred stocks currently trading. Of these four income securities,
ASB-C, issued in June 2015 with a 6.125 percent coupon, became callable
on June 15, 2020. While the prospectus for the new ASB-F does not say
as much, ASB could use the proceeds from the 4 million share ASB-F to
redeem all 2.6 million outstanding shares of ASB-C. Doing so would save
ASB $325,000 per year in dividend expense and leave them with about $35
million in left over ASB-F cash. ASB is a $2.1 billion regional bank
offering banking services through 248 banking locations throughout
Wisconsin, Illinois and Minnesota. The company was founded in 1861 and
is headquartered in Green Bay.
OPINL
is a double-investment grade (Baa3/BBB-) ETDS from Office Properties
Income Trust (OPI) offering 6.375 percent annual interest. Together
with Hancock Whitney’s HWCPZ discussed above, OPINL is the second
income security since March 2019 that is able to meet all ten of the
selection criteria found in my book, Preferred Stock Investing, Fifth
Edition. OPI is a property REIT, owning 184 office buildings throughout
the United States. Their 31 buildings in the Washington, D.C. area
generate 38 percent of OPI’s rental income (as of March 30, 2020).
OPINL raises about $150 million for the company, the bulk of which will
be used to pay down debt. The debt on one of OPI’s properties comes due
in August, 2020 at which time the company will need to cough up $39.9
million. Using some of the proceeds from OPINL is likely, although
doing so converts the property’s 3.6 percent debt into OPINL’s 6.375
percent rate. Proceeds from OPINL are also earmarked to repay debt
under the company’s revolving credit facility, $345 million of which
matures in January 2023. OPI is a $1.2 billion office REIT, the result
of the 2018 merger of Government Properties Income Trust and Select
Income REIT.
TBKCP
is an unrated traditional preferred stock from Triumph Bancorp, Inc.
(TBK) offering 7.125 percent annual dividends. Triumph is a small
regional bank headquartered in Dallas, Texas although the bank does
very little of its business in the state. The COVID mess has been
particularly hard on small banks, and TBK is no exception, losing about
half of its market cap value since mid-February ($42/sh then, $23/sh
now). TBKCP raised about $45 million for this $550 million bank. TBKCP
is the bank’s first and only preferred stock offering.
FMDWL/FMBIO
is a traditional preferred stock from First Midwest Bancorp, Inc.
offering speculative grade (Ba1/BB-) non-cumulative 7.0 percent annual
dividends. Like many regional banks, FMBI’s common stock has lost about
half of its value since the COVID mess kicked in, falling from about
$23 to a $12.22 close on June 26. FMBI has two preferred stocks
trading, introduced 30 days apart and are essentially identical,
offering the same 7.0 percent coupon and both becoming callable on
August 20, 2025. Each new issue raised about $100 million for the
company. FMBI is a $1.4 billion bank holding company operating branch
bank office location throughout metropolitan Chicago, southeast
Wisconsin and across the Midwest. The bank was founded in 1982 and is
headquartered in Chicago.
HTLFP
is an unrated traditional preferred stock from Heartland Financial USA,
Inc. (HTLF) offering 7.0 percent dividends until its First Reset Date,
July 15, 2025. The dividend rate paid by this security resets on that
date, and every fifth annual anniversary thereafter, based on the
then-current five-year Treasury rate plus 6.675 percent. Heartland has
never been shy about acquisitions, even throughout our COVID-tainted
market. As of March 31, 2020, HTLF has eleven separate, but
wholly-owned, subsidiary banking operations throughout the United
States. On February 11, Heartland’s Texas-based subsidiary acquired
Levelland, Texas-based AIM Bancshares which will then be rebranded as
First Bank & Trust. Then on June 9, Heartland’s Arizona Bank &
Trust subsidiary acquired the operations of Johnson Bank and its four
Arizona banking centers. Heartland is a $1.1 billion bank holding
company originally founded in 1981 and headquartered in Dubuque, Iowa.
WCC-A
is the first and only preferred stock issued by WESCO International,
Inc. (WCC). WCC-A was issued specifically as a result of the company’s
acquisition of Anixter International, Incorporated. This was actually a
three-party transaction whereby Warrior Merger Sub, Inc., a wholly
owned subsidiary of WESCO, was merged with Anixter, with Anixter
surviving the merger, then Anixter continuing business as a wholly
owned subsidiary of WESCO. As you might guess, the SEC filings related
to this transaction, and the WCC-A preferred stock shares created
thereof, are a bit complex but were required to sweeten the deal for
Anixter shareholders. Without knowing more about it (which, after
reading the filings I hope to never have a need for), it is unclear why
WCC-A was not created as a private placement security to Anixter
shareholders. But WCC-A is publicly-traded and, if you can stand the
pain of understanding the particulars of this security, is now
available for purchase on the NYSE.
Sources:
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses:
AUBAP, HWCPZ, UCBIO, ATH-C, SBBA, PSA-L, AEL-B, ASB-F, OPINL, TBKCP, FMDWL/FMBIO, HTLFP, WCC-A
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 (WCC-A).
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-L).
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 (OPINL, SBBA, HWCPZ).
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 (HTLFP, FMDWL/FMBIO, TBKCP, AEL-B, ASB-F, ATH-C, UCBIO,
AUBAP). See the Status column in the first table in
this article.
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 2-year bank Certificates of
Deposit or the 10-year Treasury note.
U.S.-traded
preferred stocks are currently returning an average current yield of
7.3 percent (blue line) while that of the 2-year bank CD is at 1.1
percent and the annual return being offered to income investors by the
10-year treasury is 0.6 percent.
For
comparison, I have set the Yield column in the first table above to
show the current yield of the new preferreds on June 30. It is
into
this marketplace that June’s new issues were introduced.
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