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APRIL 2015

Issue 97

 
 

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Preferred Stock Investing, 5th Edition

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In This Issue:

High Quality Preferred Stocks

Preferred Stock News

Special Announcement

More Preferred Stock Research

Free Special Offer

 
         

 

 

"Concise, complete and professional. I would have never invested in a preferred had it not been for the book and subsequent subscription.”

- from Don Q., CDx3 Notification Service subscriber, March 15, 2015. See more preferred stock investor reviews here.

 

 

 

 

 

 

 

 

 

 

 

 

 

by Doug K. Le Du

 

Preferred stock researcher

PortfolioChannel contributor

Syndicated writer

Author

 

 

 

 

80 Reader Reviews

 

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See page 6 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, for symbols.

 

 

 

 

 

HIGH QUALITY PREFERRED STOCKS

 

Top 10 Investment Grade, Cumulative Preferreds Available Under $25

 

 

The ten highest quality preferred stocks that are selling for a sub-$25 market price are offering income investors an average 6.2 percent Yield-To-Call in today's preferred stock marketplace.

As rates move up and down over time, prices tend to move in the opposite direction, moving down and up, respectively. This is why preferred stock investing is long-term investing, taking advantage of the known inverse relationship between rates and prices over time.

The search engine parameters seen in Figure 1 look for preferred stocks and exchange-traded debt securities (ETDs) that are currently trading below their $25 par value, have cumulative dividends (meaning that if the issuing company skips a dividend payment to you, they still owe you the money) and offer investment grade ratings from Moody's Investors Service.

Currently priced below par

Purchasing shares below $25 is an important consideration for many preferred stock investors. In the event that your shares are redeemed (bought back from you) by the issuing company, shareholders will receive the security's par value in cash in exchange for their shares. By purchasing shares below their par value ($25 in most cases and in all of the cases shown here), preferred stock investors are able to add a layer of principal protection to their investment while also positioning themselves for a downstream capital gain in the event of a future call.

 

Figure 1 shows the complete filter used to find these gems. Of the twenty parameters that can be set, the four arrows highlight the keys for this search. Setting the "Currently priced below par" parameter to "Yes" does the magic here.

 

 

In addition to finding the highest quality issues that offer cumulative dividends and are currently trading below their $25 par value, this filter also limits the list to issues that have not suspended their dividend payments. And by setting "Today's price, at least" to $0.01 and "Today's volume, at least" to 1 share the filter will exclude less liquid issues (securities that have not traded today).

This is just one example. Click on the filter image to see another one along with a more detailed explanation.

Results

Figure 2 shows the results when this search is applied to our Preferred Stock List
TM database (please note that to protect the values of subscriptions to our CDx3 Notification Service, trading symbols are obscured here). Already a CDx3 Notification Service subscriber? See page 6 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, that you received at the end of last month for symbols.

 

 

There were a total of 894 preferred stocks and ETDs trading on U.S. stock exchanges as last month came to a close. Of these 894, these are the top ten highest quality issues that are trading below their $25 par value. This list is sorted by dividend rate (coupon) with the highest payers listed first.

The securities shown in green font are ETDs (ETDs are bonds that trade on the stock exchange rather than the bond market and are very similar to preferred socks) while the remaining securities listed are preferred stocks. All have a current market price (seen in the Last Price column) that is below their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's.

Keep an eye out for sub-$25 buying opportunities such as those listed here. The lower your purchase price, the more principal protection you'll have. The preferred stocks and ETDs listed in Figure 2 are offering some of the best choices available to you as an income investor.
 

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PREFERRED STOCK NEWS

 

Preferred Stock Market Q1/2015: Investment Grade Preferred Stocks Available Below $25

 

With the first quarter of 2015 behind us, the number of investment grade preferred stocks selling for a market price below $25 is now at 39. While 39 candidates is much lower than the 98 we had last year at this time, it is still plenty for preferred stock buyers to pick from.

 
In early-2014, preferred stock investors were certain that as the Fed tapered out of its QE bond-buying program, interest rates would go up. After all, when the Fed launched QE with the objective of lowering rates, the program worked so it seemed reasonable that backing out of QE would have the opposite effect.


In anticipation of higher rates, the average market price of preferred stock shares fell to $24.53 at the end of Q1/2014, pushing up the number of investment grade candidates that were selling below their par value ($25 in most cases) to 98.


The Preferred Stock Market, Q1/2015
 

As we now know, the expected rate increase did not materialize as the Fed exited their QE program. The price drop that we saw during early-2014 turned out to be short-lived. Average preferred stock prices now sit at $25.65 per share, up $1.12 over the last twelve months.


This Preferred Stock Market Snapshot™ chart depicts the preferred stock marketplace at the end of Q1/2015 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 represents a preferred stock. The sweet spot of the preferred stock marketplace is depicted in the green lower-left quadrant - investment grade preferreds selling for a market price below their $25 par value.


While there are currently 894 preferred stocks trading on U.S. stock exchanges, 319 meet the criteria listed under the chart. The arrow in the table below the chart points to the migration that we have seen over the last year. As prices have increased since the end of Q1/2014, the percentage of the market occupied by investment grade securities that are priced below $25 has fallen to 12 percent, down from 31 percent a year ago.


(Source: CDx3 Notification Service database, PreferredStockInvesting.com)
 

Maximum Yield Candidates
 

The purple diamonds on the above chart identify the four preferred stocks that are offering the maximum current yield from each quadrant (not to be taken as recommendations): CTY, HSEA, MHO-A and GDP-C.

 


 

Note that for comparison purposes, I have selected Current Yield (CY) for the Yield column rather than Yield-To-Call (YTC) or Effective Annual Return (EAR) since two of these four securities have exceeded their call dates (YTC and EAR are not able to be calculated in those cases).


CenturyLink’s (CTL) CTY would interest preferred stock investors looking for competitive multi-year income production with relatively low investment risk. Issued in May, 2013, CTY offers a Baa3 investment grade rating and cannot be redeemed by CenturyLink until June 1, 2018. This security offers a 6.125 percent annual dividend (coupon), paying $0.38 per share each quarter. CTY closed at $25.00 on March 31. CTY, presented here in green font, is an Exchange-Traded Debt Security (ETDs). ETDs are very similar to preferred stocks and are often labeled as such, but they are actually bonds that trade on the stock exchange (rather than the bond market). ETDs offer cumulative dividends and are recorded on the company’s books as debt rather than equity. As bonds, ETDs are generally seen as having less investment risk than the same company’s preferred stocks (see “Preferred Stock Investors: 'Exchange Traded Debt Securities' Offer Same Reward, Lower Risk”, March 20, 2012). At 6.13 percent, CTY has the highest current yield of today’s investment grade securities that are trading below their $25 par values.


HSEA is a trust preferred stock (TRUPS) introduced by Britain’s largest bank, HSBC Holdings PLC (HSBC), at 8.125 percent in April 2008 and has been callable since April 15, 2013. Note that HSEA offers Qualified Dividend Income (QDI) to individual investors (but not to corporate investors since HSBC is a foreign company). As a TRUPS, HSEA provides cumulative dividends but today’s buyers should be sure to read the prospectus of this security since the issuer, at their option and at any time, is able to convert these cumulative HSEA shares into non-cumulative “dollar preference shares.” Today’s buyers may also have to find a way to overlook the $1.92 billion fine that HSBC was required to pay in late-2012 for providing illegal banking services to the world’s drug cartels (see “Bleak day for British banking as Libor arrests follow record fine for HSBC”, The Guardian, December 11, 2012) and the bank’s role in the LIBOR manipulation scandal more recently, the settlement to which the bank may be reneging on (see “U.S. May Revoke Settlement Agreements in Currency-Rigging Probes”, Bloomberg, March 17, 2015). Today’s $26.24 market price exposes buyers to a $1.24 capital loss in the event of a redemption of HSEA shares.


MHO-A is a traditional preferred stock introduced in March 2007 at 9.75 percent by M/I Homes, Inc. (MHO). M/I Homes was founded in 1973 and develops single family homes throughout the United States. At Caa1, MHO-A is well into Moody’s speculative grade rating scale which explains the 9.52 percent current yield for this security. Shareholders were caught short during the summer of 2008 when the company suspended the dividends on these non-cumulative shares. Dividend payments were resumed in June 2013. Trading at $25.60, today’s buyers are exposed to a $0.60 per share capital loss in the event of a redemption (MHO-A became callable on April 10, 2013).


GDP-C is a traditional preferred stock offering cumulative dividends and was introduced in April 2013 by Goodrich Petroleum (GDP) at 10.0 percent. Its Caa2 rating is so low that this security is barely hanging onto the low end of the Moody’s scale. The early-October, 2014 plunge in global oil prices showed up quickly in the market prices for energy-related securities, especially upstream producers such as Goodrich. The company is currently looking to sell assets in order to meet its cash obligations (see “Goodrich shares slump after company says to explore sale of shale asset”). GDP-C started last October at $26.30 per share but dropped to $7.81 on March 31. The more risk-tolerant among us might consider GDP-C as a capital gain opportunity, assuming that the company is able to survive (or be acquired). Note too that GDP-C is a QDI-designated security.
 

These four securities from four vastly different companies are offering the maximum current yields in the four key quadrants depicted by the Preferred Stock Market Snapshot™ chart.
 

(Source: SEC prospectus filings for CTY | HSEA | MHO-A | GDP-C)
 

What’s next?
 

The largest crude oil storage facility in North America, located at Cushing, Oklahoma, was three-quarters empty last September. Since then, the amount of crude at Cushing has tripled and the facility is expected to be full by Memorial Day, the growing supply pushing oil prices down.


Oil prices are reflected in the cost of all things that need to be manufactured or transported (which is essentially all things), so falling oil prices reduce inflation pressures substantially. With less inflation pressure, the Fed is less likely to begin raising interest rates than they would be otherwise. And as long as interest rates remain artificially low, as held down by Fed monetary policy, the market prices of income securities such as preferred stocks are likely to remain artificially high.


Until the Fed starts backing out of our market, which from my perspective cannot happen soon enough, preferred stock investors will need to look harder to find high quality preferred stocks in today’s market for sub-$25 prices.

 

 

 

 

 

 

 

 

 

 

See Reader Reviews

Table of Contents

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SPECIAL ANNOUNCEMENT

 

Preferred Stock Investing, Fifth Edition

Learn how to screen, buy and sell the highest quality preferred stocks

 

Preferred Stock Investing is one of the highest reader-rated books in the United States with 80 reviews posted at Amazon.

A new edition of Preferred Stock Investing is published every other year in order to keep up with current market trends and research. The Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are expected to face.

See: Reviews | Table of Contents | Free Excerpt | Paperback | eBook

The Fifth Edition has 21 chapters organized into six Parts over 334 pages. Here are some highlights:

- Part I, "The Preferred Stock Market," introduces a new suite of charts and metrics specifically designed to measure and track the preferred stock marketplace.

- Part III, "Buying the Highest Quality Preferred Stocks," includes several new chapters such as "Buying 'Fed-Free' Preferred Stocks," "Keeping Up with Increasing Interest Rates" and "Buying Less-Than-Perfect Preferred Stocks."

- And chapter 8, "Managing the Risks," has been completely rewritten and expanded to include risks that are unique to preferred stocks during the increasing rate environment that awaits us.

You can pick up a copy of the new Fifth Edition of Preferred Stock Investing at your favorite online retailer such as Amazon (paperback) or directly from BookLocker, the book's publisher (BookLocker provides paperback and PDF eBook formats).

 

 

 

 

 

 

 

 

 

 


MORE PREFERRED STOCK RESEARCH

 

Recent Preferred Stock Articles by Doug K. Le Du

 

Here is a list of some of my recent syndicated articles. To view an article, just click on the headline.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


FREE SPECIAL OFFER

 

Preferred Stock Market Research Now Available All Month Long - Free

 

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.

To receive articles by email automatically without having to visit the Forum, click here

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.

Please accept my invitation to receive articles by email and visit the Forum.

 

   
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Disclaimer

The content of this newsletter, and the materials that it links to that are owned by Del Mar Research, LLC, are to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be presented herein. Consider your financial resources and goals before investing. You, and not Del Mar Research, LLC, are solely responsible for your own investing decisions.