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High Quality Preferred Stocks

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Quick Summary

This month's High Quality Preferred Stocks article describes how preferred stock market prices have been falling back toward their more normal levels. Out of the 981 preferred stocks and exchange-traded debt securities that were trading on U.S. stock exchanges at the end of December 2012, 32 specific issues with Moody's investment grade ratings were trading below their $25 par value. That's a substantial improvement over the 24 such securities at the end of November - great news for buyers. (jump to article)

The Preferred Stock News article explains why 2013 should be relatively positive for preferred stock buyers, especially in light of the miserly alternatives being offered to risk-averse, income-oriented investors. Buyers should watch for modestly higher yields at slightly better market prices with little or no threat of increasing interest rates. (jump to article)

The Special Announcement article announces a new and very powerful subscription program for preferred stock investors. Our Preferred Stock List^TM database and search engine, long enjoyed by subscribers to our comprehensive CDx3 Notification Service, is now available as a separate subscription for do-it-yourself investors. The database includes last trade price, today's trading volume, current yield, ex-dividend dates and much more, all of which can be sorted, downloaded and printed at any time. You can create and save your own filters and watchlists of trading symbols, too. (jump to article)

The Preferred Stock Facts article is presented both here and on the PreferredStockInvesting.com website. Test your knowledge by clicking on any preferred stock question to see the multiple-choice answers. You will receive an automatic email that provides you with the correct answer and my explanation. (jump to article)

In the Free Special Offer article I offer to provide you with some of the research from my book, Preferred Stock  Investing, Fourth Edition. I am making it available to brokers, financial planners and investment groups for free. (jump to article)

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Fewer Redemptions and EU Stability Mean Better Market Prices and Moderately Higher Yields

As 2013 unfolds, preferred stock investors looking for moderately higher yields available at better market prices should not be disappointed.

Over the last year, the marketplace for preferred stocks has been characterized by relatively high prices, a bumper crop of new issues, redemptions of older issues and bank-issued trust preferred stocks (TRUPS) and relatively stable but lower yields than have historically been the case.

This Preferred Stock Market Snapshot chart depicts the preferred stock marketplace at the end of 2012 (December 28, 2012) along with two characteristics that are usually high on the list of considerations for risk-averse preferred stock investors - current market price (above and below these securities' $25 par value) and investment risk (as reflected by investment grade versus speculative grade Moody's ratings).

Each diamond on the chart represents a qualifying preferred stock [1]. An example is highlighted in blue within each of the four quadrants: GEB from General Electric Capital, JPM-D from JPMorgan, WFC-O from Wells Fargo and GS-I from Goldman Sachs. Each of these examples (which are not intended as recommendations) are widely held non-TRUPS and are call-protected until 2017, meaning that they do not reach their respective call dates for several years.

Trends can be identified by comparing this ending-Q4 chart with earlier 2012 quarterly iterations of this analysis (ending-Q2 here | ending-Q3 here).

Trend: Investment Grade Available For Less Than $25 Par

Preferred stocks that carry investment grade ratings and are trading for a market price below their $25 par value represent the sweet-spot for many preferred stock investors (green, lower left). During Q4, the number of choices here increased to 36, up from 25 three months earlier (note that this Snapshot chart includes preferreds trading on all U.S. stock exchange except the Over-The-Counter exchange, whereas the 32 preferreds itemized in Figure 2 include those trading on the NYSE only).

Further, the average market price of these 36 investment grade preferreds was $24.39, down $0.30 per share from the ending-Q3 value.

Trend: Market Prices Are Moving Toward Par

In good news for buyers, preferred stock market prices dropped during the fourth quarter of 2012, falling to an average $25.44 per share overall from $25.70 three months earlier.

While we saw those favoring European assets flee to U.S. preferred stocks earlier in the year (driving up prices here), the much publicized "fiscal cliff" panic throughout the fourth quarter sent many such investors back to the EU (lowering prices here).

Trend: Lower Yields

As December came to a close, the U.S. preferred stock market is offering investors an overall average yield of 6.55%, a drop from 6.93% at mid-year, largely due to the diluting effect of a bumper crop of new issues that were introduced throughout Q4 with somewhat lower dividend rates.

The Federal Reserve's low-to-no interest rate monetary policy continues to decimate savers. With bank CDs offering a mere 1.1% and investment grade corporation bonds coming in at 3.7% [2], the average 6.55% yield now being offered by preferred stocks may not look so bad.

Looking to 2013

While it is not possible to know with any certainty what the future preferred stock marketplace holds for preferred stock investors, here are some of the specific activities worth paying attention to as 2013 unfolds:

- Interest Rates: Income-oriented investors fear interest rate increases since such upward movement in rates tends to push the value (prices) of their holdings down (see related article). In an early December announcement, the Federal Reserve stated that it does not intend on increasing interest rates until unemployment realizes a substantial improvement, dropping to 6.5% from its current 7.7% (source: U.S. Bureau of Labor Statistics). In order to keep up with the organic growth in the workforce, let alone gain ground, the U.S. economy needs to add about 200,000 new jobs per month (source: Atlanta Federal Reserve), which has only happened a few times over the last several years. If the Fed sticks to their newly announced policy, it would be surprising if interest rates see much upward pressure during 2013.

- Redemptions (calls): When widely held preferred stocks are redeemed (called), a large group of preferred stock investors enters the market as buyers, looking to replace their shares. We saw the resulting spike in preferred stock market prices earlier in 2012 when redemptions were occurring almost daily. Going into 2013, however, redemptions of older non-bank preferred stocks will come to a crawl as we have now entered the "Redemption Gap" through 2015 (see related article).

- Prices: European investors returning to EU assets, selling their U.S. preferred stock positions here, puts downward pressure on prices. Progress in Europe means lower market prices for U.S. preferred stocks. Also, fewer redemptions means fewer buyers entering the market, relieving upward pressure on prices.

- Dividend Rates and Yields: The boost in yields delivered by those returning to EU assets and fewer preferred stock redemptions should put upward pressure on the dividend rate offered by new preferred stocks issued by U.S. companies throughout 2013. But improvements will be limited by the continuation of the Federal Reserve's low-rate monetary policy. To the extent that lower prices materialize during 2013, look for commensurately higher dividend yields.

- Trust Preferred Stocks (TRUPS): Bank-issued TRUPS, once the dominant player in the high quality preferred stock marketplace, will approach extinction as new domestic (Wall Street Reform Act) and international (Basel III) regulatory requirements kick in (see related article). REIT-issued preferreds will dominate the investment grade, cumulative offerings going forward.

- LIBOR manipulation scandal: What started out as a story about bad behavior could very well turn into much more for many variable rate preferred stock shareholders. Dividends paid by variable rate preferred stocks are often tied to the LIBOR which, as we are coming to find out, was being manipulated (downward) by the banks involved in setting this benchmark rate (probably since 2005). Several of these same banks issue variable rate preferreds tied to the very same LIBOR rate that they were manipulating. First, the U.K.'s Barclays bank was fined $450 million only to be followed in December by a $1.5 billion fine against Swiss bank UBS. Reports now say that the Royal Bank of Scotland is next with several more to come (see related BBC article).

2013 should be relatively positive for preferred stock buyers, especially in light of the miserly alternatives being offered to risk-averse, income-oriented investors. Buyers should watch for modestly higher yields at slightly better market prices with little or no threat of increasing interest rates.

Footnotes

[1] Preferred stocks and exchange-traded debt securities used for this chart include those that:

- have a par value of $25.00;
- are currently trading on U.S. stock exchanges (excluding the Over-The-Counter exchange);
- are rated by Moody's Investors Service;
- do not have an announced redemption that is pending;
- are paying dividends (issues with deferred or suspended dividends were excluded);
- have a fixed dividend rate (preferreds with variable or adjustable dividend rates were excluded);
- had a non-zero trading volume on the day that the data was collected (December 28, 2012); and
- are not convertible to another type of security.

[2] Bank CD interest rate is the average APY of the top ten 24-month certificates being offered by U.S. banks on December 27, 2012; source: bankrate.com. Corporate bond yield is the average daily yield offered by investment grade corporate bonds during December 2012; source: federalreserve.gov.

More Preferred Stock Research

FROM DOUG K. LE DU

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Test Your Knowledge With These Preferred Stock Facts!