PREFERRED
STOCK NEWS
COVID-19 Driving New
Preferred Stock Buying Strategy
With
rates currently bouncing around, underwriters are unable to accurately
assess market demand. And for their part, investors are having a hard
time assessing risk as businesses have had to idle much of their
activity due to COVID-19. When demand for a new income security is
unknown and risk is harder to assess, prices fall and the reward side
(yields) goes up.
So
here we are…no new preferred stocks were issued
during April, but with 28 high-quality income securities trading below
their $25 par value, who cares? We’re in a market paying higher income
for some of the best prices we have seen in years.
The
primary reason many buyers prefer newly issued preferred stocks during
a period of high prices (e.g. the last several years with very few
exceptions) is that they can frequently buy shares on the wholesale
Over-The-Counter stock exchange at introduction below the security’s
$25 par value. But during a period of lower prices (now), dozens of
high-quality issues become available for sub-$25 prices, eroding the
attraction of new issues.
But
what about the risk? While prices currently favor buyers, assessing the
risk associated with any given preferred stock can be tricky,
especially since many very attractive preferred stocks are unrated. One
approach for assessing risk is described in my article “How to Rate an
Unrated Preferred Stock” that may be helpful.
Of
the 906 income securities trading on U.S. stock exchanges (including
convertible preferred stocks), there are currently 122 high-quality
preferred stocks selling for an average price of $25.43 (April 30),
offering an average current yield of 6.3 percent.
Today’s COVID-fueled U.S. preferred
stock marketplace
The
following chart illustrates the average market price of U.S.-traded
preferred stocks over the last twelve months. The effect of the
COVID-19 pandemic is pretty easy to spot.
Beyond a global virus outbreak, there are many things that
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 a 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
7.5 percent (blue line) while the annual return being offered to savers
by the 2-year bank CD is at 1.5 percent and the 10-year treasury is
offering a paltry 0.6 percent.
Prior
to the COVID-19 outbreak, U.S. preferred stocks were delivering an
average current yield of about 6.5 percent. At the end of April,
COVID-19 is now delivering a 7.5 percent annual return at lower prices.
Higher income with cash left over for today’s preferred
stock buyers.
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