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Fourth Edition of Preferred Stock Investing!
Readers of Preferred Stock Investing learn how to screen, buy and sell the highest quality preferred stocks.
The Fourth Edition is now available at your favorite online retailers (see retailers).
The Fourth Edition of Preferred Stock Investing includes the latest research and updated charts and examples using real preferred stocks.
And Part III "Buying When The Market Favors Buyers" has been completely re-written to focus on the buying conditions that we will be facing throughout 2012. Check out the new Fourth Edition Table of Contents.
The preferred stock investing method explained throughout the book - the "CDx3 Income Engine" - uses three rules and ten selection criteria to accomplish its three objectives: maximize revenue while minimizing risk and minimizing work. The results are itemized in chapter 15 for every qualifying preferred stock issued since January 2001.
Preferred Stock Investing is one of the highest reader-rated books available at Amazon. Look for your copy of Preferred Stock Investing, Fourth Edition at your favorite online retailer.
The Last Month's CDx3 Investor Results article describes a special risk with several bank-issued trust preferred stocks (TRUPS) that many preferred stocks investors appear to have forgotten about (or never knew about before investing). Several TRUPS, issued by our Big Banks over the years, are prematurely callable right now even though they have yet to reach their published call dates. (jump to article)
The Special Announcement article explains how three criteria, when applied to the 1,000+ preferred stocks trading on U.S. stock exchanges, allow you to identify the highest quality issues. The table in this article takes the analysis a step further by itemizing 8 of these high quality issues that can be purchased today for a market price that is less than $25 (par). Secondly, I have summarized some of the research from my book, Preferred Stock Investing, Fourth Edition, and am making it available to brokers, financial planners and investment groups for free. (jump to article)
The CDx3 Question of the Month is presented both here and on the Preferred Stock Investing Reader's Forum. If you visit the Forum you can test your knowledge by clicking on your answer to the question. You will receive an automatic email that provides you with the correct answer and my explanation. Or you can just read the answer in the below CDx3 Question of the Month article. This month's question - "How can I tell if there is strong demand for a preferred stock?" (jump to article)
Why wait until next month's CDx3 Newsletter to find out what is going on in the preferred stock marketplace? Throughout the month I post regular research articles on the Preferred Stock Investing Reader's Forum and make them available to you for free. In the Free Special Offer article below I provide you with a link that allows you to receive my posts via an email message rather than having to visit the Forum to see what's new. Any time a new article is posted, you will receive a message in your email inbox automatically - free. (jump to article)
Enjoy this month's issue. I look forward to reporting back to you in next month's issue of the CDx3 Newsletter.
The Hidden Risk Of Buying Today's Trust Preferred Stocks
Case Study: Last Week's Announcement Puts BBT-B Buyers At Extreme Risk
There is a special risk with several bank-issued trust preferred stocks (TRUPS) that many preferred stocks investors appear to have forgotten about (or never knew about before investing). Several TRUPS, issued by our Big Banks over the years, are prematurely callable right now even though they have yet to reach their published call dates.
Unknowingly, many preferred stock investors are buying shares of these prematurely callable preferred stocks every day for prices well above par. In the event of a call, shareholders will receive the par value ($25) in cash so purchasing shares above par exposes the investor to a capital loss in the event of a call.
Case Study: BBT-B From BB&T Corporation
BBT-B from BB&T Corporation provides a good example. BBT-B was issued for 23 million shares on July 21, 2009, pays a 9.60% annual dividend and has a published call date of August 1, 2014. Last week, BB&T introduced a new non-cumulative traditional preferred stock (to trade as BBT-D) at 5.85%.
You'll never guess how many shares the
new BBT-D was issued for last week...yep, 23 million; the same as the number
of BBT-B shares that are currently outstanding. While we do not yet
know for sure, preferred stock investors should be aware that BB&T
may be about to call BBT-B (9.6%) using the cash generated
from the new BBT-D (5.85%). Doing so would save the bank over $21
million per year in dividend expense.
"Hey wait Doug, this preferred stock is not callable until August 1, 2014. After all, August 1, 2014 is the call date that is published in this preferred stock's prospectus right on page 1. Sure it closed last Wednesday at $26.10, well above its $25 par value, but so what? It pays a whopping 9.6% dividend and is not callable for another two-and-a-half years! Sure I'd be paying above par but I'll just sell my shares in, say, one year and be well clear of that August 2014 call."
The average daily volume of BBT-B is about 100,000 shares (94,263 on May 2, 2012) so there are obviously a lot of preferred stock investors, eyes glazed over by BBT-B's 9.6% dividend rate, who are thinking this way. As I am about to explain, these preferred stock investors are exposing themselves to a hidden risk in today's market for Big Bank TRUPS and are most likely doing so without being aware of it (or the fact that BB&T issued BBT-D last week for the same number of shares as are outstanding for BBT-B).
Because BB&T deleted three words from the standard Big Bank TRUPS prospectus language, BBT-B became callable on July 21, 2010 regardless of its published call date of August 1, 2014.
Standard Big Bank TRUPS Language: The 90 Day Limitation
Historically, banks issued TRUPS primarily because these securities count toward a key measure of a bank's reserves ("Tier 1 Capital"). But standard TRUPS prospectus language says that if the government changes the formula for Tier 1 Capital (a "capital treatment event") that they, the bank, will have 90 days to prematurely call the TRUPS since a change in the formula would be like changing the rules after the game has started.
Here is how standard Big Bank TRUPS prospectus language looks
(shortened for readability here):
The standard language goes on to define a capital treatment event as "...the occurrence of any amendment to, or change (including any announced prospective change) in the laws...which amend or change [our ability] to treat...the Trust Preferred Securities as Tier 1 capital..."
Notice that this standard TRUPS prospectus language defines a capital treatment event as having occurred if a change in the Tier 1 Capital formula is either "announced" or when such a change is actually implemented.
The Wall Street Reform Act, signed into law on July 21, 2010, announced that the government was going to be changing the formula for Tier 1 Capital to exclude Big Bank TRUPS and that this change would be implemented on January 1, 2013. That creates two capital treatment events, the first occurring on the day the Act was signed announcing the pending change and the second, which has yet to occur, when the change is actually implemented on January 1, 2013.
Regardless of their published call dates, all Big Bank TRUPS that include the above standard language became prematurely callable for the 90 days following July 21, 2010 and will become prematurely callable again for the first 90 days of 2013.
Non-Standard Language To Watch For
But a few years ago, sensing that a change in the Tier 1 Capital
formula might be heading their way, several Big Banks prudently
removed the "...within 90 days" provision from the standard
language. Look at the same paragraph from the prospectus of BBT-B
BBT-B's prospectus then provides the standard definition of a capital treatment event as seen above in the first example. Notice that the 90 day limitation language is missing from BBT-B's prospectus.
Because the 90 day limitation language was deleted from BBT-B's prospectus, the bank is allowed to prematurely call this security at any time if a "capital treatment event" occurs, which it did on July 21, 2010 when the Wall Street Reform Act was signed into law.
BBT-B is callable right now and has been since July 2010. To their credit, BB&T announced at their February 2011 shareholder's conference that they would be calling BBT-B, but they did not say when they would do so.
BBT-B Price Performance
Figure 2 shows the daily closing price for BBT-B since it was introduced in 2009. I have marked July 21, 2010 on the chart. This is the day that BBT-B became prematurely callable. Buyers purchasing shares of BBT-B after that date for more than $25 per share (which is all buyers) are exposed to a $1 to $4 per share capital loss at any time.
BBT-B closed on May 2 at $26.10 after reaching a high of $26.15. While it is not possible to know for sure, it is very likely that most of these buyers are completely unaware that they are purchasing shares of a callable preferred stock issued by a company that has publicly announced that the shares will be called.
Several Big Bank TRUPS Are Prematurely Callable Right Now
BB&T is not alone. Of the approximately 150 TRUPS trading on U.S. stock exchanges, there are several other Big Banks that removed the 90 day limitation language from the prospectus of their TRUPS just as BB&T did with BBT-B.
Investors learned this the hard way when Fifth Third prematurely called FTB-C on May 18, 2011, two years prior to its published call date. Wells Fargo had also removed the 90 day limitation from its WCO TRUPS as had Wachovia from its WB-D TRUPS (subsequently acquired by Wells Fargo). WCO and WB-D were both prematurely called by Wells Fargo in September 2011 well before their published call dates.
As investors, we are continually warned to read the mind-bending prospectus prior to investing. Those considering purchasing Big Bank TRUPS shares should do so knowing that the 90 day limitation language was removed from the prospectuses of several such securities when the securities were issued several years ago. The removal of the 90 day limitation language from these securities allows the issuing bank to call them at any time, regardless of what their published call dates indicate.
How To Find The 90 Day Limitation Language
To determine if a Big Bank TRUPS that you either hold or are considering purchasing is prematurely callable you need to check the prospectus.
Do-it-yourselfers can find the prospectus of a Big Bank TRUPS from several online sources. The U.S. Securities and Exchange Commission at sec.gov offers the massive but searchable EDGAR database. From their homepage click on Search for Company Filings then Company or Fund name. Subscribers to the CDx3 Notification Service (my preferred stock email alert and research newsletter service) can find the list of prematurely callable Big Bank TRUPS on the CDx3 Notification Service homepage and prospectus links for every preferred stock trading on U.S. stock exchanges.
To help find this key language, use your web browser's search function on the prospectus to look for these phrases one at a time (this is not an exhaustive list): 90 days, capital treatment event, redemption.
If your TRUPS has the standard 90 day limitation language shown in the first example above, then your shares become callable again either (a) on their published call date or (b) during the first 90 days of 2013, whichever comes first.
If, on the other hand, the TRUPS that you are holding or are considering purchasing does not include the 90 day limitation language per the second example above (BBT-B), the shares are prematurely callable right now and have been since the Act was signed into law on July 21, 2010 regardless of their published call date.
As tedious as it can be to read a security's prospectus, this is a
clear case where preferred stock investors are at extreme risk of
unknowingly paying more than par for a callable preferred stock.
Learn To Screen, Buy and Sell The Highest Quality Preferred Stocks
Preferred Stock Investing includes the information, websites and other resources needed for you to be a very successful preferred stock investor. The Fourth Edition is now available at your favorite online retailer. For those who would rather someone else do the research and calculations, I offer the CDx3 Notification Service. Subscribers to the CDx3 Notification Service receive an email alert when there are buying and selling opportunities coming up. Subscribers also receive their own non-promotional preferred stock research newsletter every month, have their own website that hosts the CDx3 Preferred Stock Catalog and have access to the CDx3 Discussion Group, the only online forum just for preferred stock investors.
UPDATED: This Month's Under $25 High Quality Preferred Stock List
8 High Quality Preferreds Available For Less Than $25 Per Share, 6.76% Average Yield
There are about 1,000 preferred stocks trading on U.S. stock exchanges. Of these, there are eight specific issues that are of particular interest this month. Not only are these the highest quality preferred stocks available (defined below) but they are providing an average annual dividend yield of 6.76% right now (April 27, 2012).
If that isn't enough, what makes these particular preferred stocks stand out this month is that they are selling for a market price that is below their $25 "par value." Buying your shares for less than par adds a layer of principal protection to your investment.
The marketplace for high quality preferred stocks is seeing a high number of new issues and also a high number of calls so far this year. When your shares are called by the issuing company, preferred stock investors are often looking for that next purchase in order to keep their cash working for them.
In the event that the issuing company redeems (calls) the shares, shareholders will receive the par value ($25 per share) in cash from the company. By purchasing your shares for less than the par value ($25), you position yourself for a nice capital gain to pile on top of the great dividends that these high quality preferreds pay you in the meantime.
To protect the value of subscriptions to the CDx3 Notification Service (my preferred stock email alert and research newsletter service), trading symbols are obscured here. But here's how to find these high performers out of the 1,000+ available candidates.
Applying three simple criteria eliminates the pretenders and the risk and complexity that come with them, leaving us with just the highest quality preferred stocks:
Criteria #1 - Investment Grade: By limiting the choices to those preferred stocks with a Moody’s investment grade rating, we cut the list almost in half in one shot, down to about 600 issues. With 600 investment grade issues to pick from, most risk-averse investors would rather not fool around with “speculative grade” alternatives.
Criteria #2 – Cumulative Dividends: With common stocks, if the company decides not to pay a dividend, you’re out the money. But many preferred stocks have a “cumulative” dividend provision, meaning that if the issuing company misses a dividend payment to you, it still owes you the money downstream (its obligation to pay you accumulates). Limiting our choices to just cumulative dividend preferred stocks eliminates another 200 pretenders.
These two criteria (investment grade and cumulative dividends) are pretty easy for most risk-averse investors to warm up to. We are down to about 400 remaining candidates.
Criteria #3 – Minimum Rate of 6.5%: Historically, the highest quality preferred stocks carry annual coupon rates between 6% and 9%. Not too bad compared to the ~1.3% being paid by bank CDs. But rates go up and down over time and you want to be sure that you always have some breathing room if rates fall too far. A 6% preferred stock (i.e., the bottom of the barrel) can become harder to sell once rates start rising again and higher paying alternatives are introduced. Preferred stock investors can avoid this pitfall by simply sticking with preferreds that offer a fixed dividend rate of at least 6.5%, giving you time to sell once rates bounce off of 6% and begin heading back up. That takes us to about 150 remaining issues.
By applying all ten of the criteria from chapter 7 of my book, Preferred Stock Investing, and then focusing on just those that are available for less than $25 per share, we are left with the high quality issues that you see here. This list was generated in one mouse click using the Preferred Stock List(TM) software tool available to those subscribing to the CDx3 Notification Service (my preferred stock email alert and research newsletter service).
Please consider becoming a subscriber to the CDx3 Notification Service today.
Already a subscriber? The trading symbols of these high quality preferred stocks are listed on page 6 of the current issue of the subscriber's newsletter, CDx3 Research Notes. Or click on the "CDx3 Bargain Table" HotList on the CDx3 Notification Service website.
Brokers And Investment Groups: Free Meeting Materials Now Available
As the most comprehensive research service available for the highest quality preferred stocks, all of the large, and many smaller, brokerage firms subscribe to the CDx3 Notification Service.
My Preferred Stock Investing Group Materials are intended for brokers with a group of clients or self-directed investment groups that are interested in learning something about preferred stock investing.
The Preferred Stock Investing Group Materials include a slide show (27 slides, PowerPoint Show format) and an accompanying handout that provides my commentary for each slide. The handout is available in color and black and white (PDF format) for easy printing.
The materials include my tips regarding how to select, buy and sell the highest quality preferred stocks and summarize much of the research from my book, Preferred Stock Investing. Specifically, the materials are organized into three parts:
Part 1: Approach and Objectives To Preferred Stock Investing
Part 2: How and When To Buy and Sell Preferred Stocks
Part 3: Preferred Stock Investing Resources
To request the Preferred Stock Investing Group Materials just send an email request to:
You will receive an auto-reply email message with current download instructions.
How can I tell if there is strong demand for a preferred stock?
Gauging market demand for a preferred stock that you are considering is different than performing the same exercise when considering a company's common stock. With common stock, judging market demand can be as simple as looking at the movement in market price over time; a steadily increasing market price can indicate strong demand. Demand for common stock is usually driven by a market belief that improved profitability is right around the corner.
But with preferred stock there are other market forces that influence market price. My book, Preferred Stock Investing, illustrates the Three Rules of Market Price Predictability. One of these Rules is called the Rule of Buyer/Seller Behavior and governs the market price behavior of a preferred stock over the short-term period of a single dividend quarter.
It is because of the Rule of Buyer/Seller Behavior that gauging market demand for a preferred stock is fundamentally different from doing so for a common stock. Using this Rule, we can not only determine whether market demand is stronger or weaker than we would expect, but we can actually quantify that strength or weakness.
Per the Rule of Buyer/Seller Behavior, a preferred stock that is closer to its dividend pay day takes on more value (demand) than an otherwise identical preferred stock that is further away. Makes sense.
But notice how this has nothing whatsoever to do with how the market feels about the company's profitability prospects. Since preferred stock dividends are known in advance, the company's ability to pay the upcoming dividend is more closely tied to cash flow than to quarterly profits. So the proximity of the upcoming dividend in time becomes the key driver of market price.
And just as an approaching dividend pay day (the "ex-dividend date") puts upward pressure on the market price of a preferred stock (beyond what it would be otherwise), downward pressure is exerted as soon as that pay day comes and goes (i.e. the passing of the ex-dividend date) and a new dividend quarter begins.
The question this month for preferred stock investors:How can I tell if there is strong demand for a preferred stock?
The market price increases over time
(C) The market price drops by less than the dividend after the ex-dividend date
The correct answer to this question is (C), the market price drops by less than the dividend after the ex-dividend date.
The Rule of Buyer/Seller Behavior (Preferred Stock Investing, page 45) tells us that the market price of a preferred stock will tend to increase, beyond where it would have otherwise, as the dividend pay date (the ex-dividend date) approaches. In a theoretical perfect market, this increase would be for the exact amount of the upcoming dividend payment.
Then, continuing our perfect market scenario, the market price would drop by exactly the amount of the quarterly dividend once the ex-dividend date passed and the process would start all over again. For example, a preferred stock that pays an 8 percent annual dividend generates $2.00 per share per year. That's $0.50 per quarter. So, in a theoretical perfect market we would expect to see the market price increase throughout the quarter, reaching an increase of $0.50 the day prior to the ex-dividend date. On the next day (the ex-dividend date) we would then expect to see the market price fall by $0.50 and the process would start over again.
But the market is never perfect, of course. Disruptive events (a Global Credit Crisis, geopolitical flare-ups) alter the behavior of buyers and sellers and motivate them to make decisions that are different than they would otherwise make.
By comparing the actual price change throughout a dividend quarter with our expected price change (the dividend amount) preferred stock investors can determine if there is strong or weak demand for a specific preferred stock.
In the case of our 8 percent preferred stock example, if the market price drops by, say, $0.20 following the ex-dividend date (rather than the expected $0.50), there is very strong demand in the marketplace for this preferred stock.
Where common stock investors frequently look at market price trends over time to gauge market demand for a common stock, preferred stock investors have a much more direct metric that actually allows us to quantify the level of market demand for a preferred stock every quarter in much less speculative fashion. Chapter 3 of Preferred Stock Investing includes actual market data and a chart that illustrates this mechanism.
Preferred Stock Market Research Now Available All Month Long - Free
Automatic Email Delivery Of Preferred Stock Market Research Now Available
Readers do not have to wait until next month's issue of the CDx3 Newsletter to stay plugged into the market for high quality preferred stocks. Preferred stock research articles, marketplace observations and preferred stock news from the financial press and other information are posted to the Preferred Stock Investing Reader's Forum (my "blog") throughout the month.
A separate window from FeedBurner (a Google service) will open on your screen. Enter and verify the email address that you want articles from the Forum to be emailed to as instructed. And don't worry - you'll never receive any spam from me and your email address will not be shared.
By receiving the articles as I post them via email, you do not have to visit the Forum in order to stay plugged into my research regarding the marketplace for the highest quality preferred stocks.
to screen, buy and sell the highest
quality preferred stocks by
the Fourth Edition of my book, Preferred
Stock Investing (see
retailers). The book identifies
the resources that you need to be a very
successful CDx3 Investor completely on
your own. If you would rather we do the
research and calculations for you I
CDx3 Notification Service
15 of Preferred Stock Investing
includes a list of all of the CDx3
Preferred Stocks issued since January
2001 and the investing results you
would have achieved had you invested in
them using the CDx3 Income Engine.
readers also receive free periodic
updates to the preferred stock lists in
chapter 15 as long as the Fourth Edition
of the book is in print.
take a look at
And if you
someone who might be interested in simple
for non-experts please have them send an email
they will automatically
begin receiving this monthly CDx3
next month (plus a
CDx3 Special Report) - all FREE.
Chapter 15 of Preferred Stock Investing includes a list of all of the CDx3 Preferred Stocks issued since January 2001 and the investing results you would have achieved had you invested in them using the CDx3 Income Engine.
And readers also receive free periodic updates to the preferred stock lists in chapter 15 as long as the Fourth Edition of the book is in print.
Please take a look at www.PreferredStockInvesting.com. And if you know someone who might be interested in simple investing for non-experts please have them send an email message to:
and they will automatically begin receiving this monthly CDx3 Newsletter next month (plus a CDx3 Special Report) - all FREE.
Many Happy Returns,
Doug K. Le Du
Copyright (c) 2012 by Doug K. Le Du
Preferred Stock List, CD Times 3, CDx3, CDx3 Income Engine, CDx3 Investor, CDx3 Portfolio, CDx3 Preferred Stock, CDx3 Perfect Market Index, CDx3 Bargain Table are trademarks of Doug K. Le Du. All rights reserved.
Company logos are trademarks of the indicated companies. Service Marks (SM) are service marks of the indicated companies.
DISCLAIMER: The content of this CDx3 Newsletter is to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be discussed herein. Consider your financial resources, goals and risk tolerance before investing. You, and not Doug K. Le Du, are solely responsible for your own investment decisions.