PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, May 2016
May was a solid month for new
preferred stocks, with ten new issues being
introduced with an average current yield of
6.1 percent for the consideration of
preferred stock investors. There are now 899
of these securities trading on U.S. stock
exchanges.
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.
Anxious to sell the new shares, underwriters
will generally sell to broker/dealers using
a temporary trading symbol on the wholesale
Over-The-Counter exchange (who, in turn,
sell them to us at retail within a few days
of the IPO date).
Buying New Shares
for Wholesale
Note that the three most recently introduced
issues - GDSTP, HRHPP and GABUP - are still
trading on the Over-The-Counter exchange (as
of May 27). These are temporary OTC trading
symbols until these securities move to a big
board exchange, at which time they will
receive their permanent symbols. But there
is no need to wait; during a period of high
prices, individual investors, armed with a
web browser and an online trading account,
can often purchase newly introduced
preferred stock shares at wholesale prices
just like the big guys (see "Preferred
Stock Buyers Change Tactics For Double-Digit
Returns" for an explanation of how
the OTC can be used to purchase shares for
discounted prices during a period of high
preferred stock prices).
Your broker will automatically update the
trading symbols of any shares you purchase
on the OTC. GDSTP will become GOODM; HRHPP
will become HT-D and GABUP will become
GUT-C.
Diversification
May’s preferred stock offerings are unique
in several ways. First, all ten of the new
issues are traditional preferred stocks (no
Exchange-Traded Debt Securities and no
3rd-party Trust preferreds) and only one
bank is represented – IBKCO from Iberiabank
(IBKC). Among these ten May issues, all
except IBKCO offer cumulative dividends
(meaning that in the event of a skipped
dividend payment, the company still owes you
the money; their obligation accumulates).
Further, six of the new issues are from
property REITs – HRHPP from Hersha
Hospitality Properties (HT), LHO-J from
LaSalle Hotel Properties (LHO), AMH-D from
American Homes 4 Rent (AMH), PSA-C from
Public Storage (PSA), SHO-F from Sunstone
Hotels (SHO) and DFT-C from DuPont Fabros
(DFT). And three of these six
property REITs are hotel REITs – HRHPP,
LHO-J and SHO-F.
GDSTP is from Gladstone (GLAD), a business
development company and Gabelli’s new GGZ-A
and GABUP are both closed-end funds.
Tax Treatment
Dividends paid by REIT
preferred stocks are a pre-tax distribution
of the company’s earnings to shareholders.
As a pre-tax distribution, it is the
shareholder who pays the full tax so
dividends received from REITS do not
qualified for any type of favorable tax
treatment (although portions of REIT
dividends are frequently re-classified at
tax-time as capital gains, hence lowering
your tax burden in that manner).
The dividends received from Iberiabank’s
IBKCO and Gabelli’s GABUP, on the other
hand, are a distribution of the company’s
after-tax earnings and are therefore
designated as being Qualified Dividend
Income (QDI), although there are exceptions
and conditions (see prospectus).
About the New Issues
Shortly after the housing
collapse that began in 2008, a group of
senior executives spun away from Public
Storage and formed American Homes 4 Rent
and, using the same capital raising strategy
that they had become accustom to, issued
three new preferred stocks – AMH-A, AMH-B
and AMN-C. With the proceeds, AMH bought
tens of thousands of distressed homes
throughout the U.S. at bargain basement
prices and turned them into rental
properties. These three issues are unique in
that their prospectuses include a provision
that increases these securities’ $25 par
value over time (the amount of the increases
being published on the company’s website).
In the event of a redemption, shareholders
will actually receive more than the stated
$25 par (see “American
Homes 4 Rent Preferred Stocks, Opportunities
And Risks”). Sadly, with the May
introduction of the new AMD-D, that
par-inflating provision has been removed.
Upon redemption, AMD-D shareholders will
receive the stated par value of $25.
Iberiabank’s IBKCO offers fixed-to-floating
dividends, meaning that they pay dividends
at the indicated coupon rate (6.60 percent)
until its call date (May 1, 2026) then, at
that time, the dividend rate becomes
variable, resetting each quarter based on a
formula as presented within this security’s
prospectus. The current 6.60 percent coupon
rate will be reset to the three-month LIBOR
rate at the time (currently 0.66 percent)
plus 4.92 percent. But be careful to notice
that IBKCO’s call date, when the new
presumably glorious rate kicks in, is ten
years from now, meaning that the income to
be generated by this security at that time
is entirely unknown.
Preferred stock investors should be aware
that variable rate preferred stocks have
rarely, if ever, benefited shareholders.
While the notion that your dividend rate
will go up with interest rates sounds great,
the fact that the presumably upward
adjustment in the rate is tied to the call
date is no accident. Historically, if the
dividend rate is going to adjust upward, the
issuing company will usually redeem the
shares in order to avoid the increase in
dividend expense. Consequently, those
purchasing fixed-rate preferred stock shares
have earned about 180 percent more than
those purchasing variable-rate preferreds
during the same period (for historical data
see “Variable-Rate
Preferred Stocks Underperform Their
Fixed-Rate Cousins”).
(Sources: Prospectuses
IBKCO,
GGZ-A,
DFT-C,
PSA-C,
SHO-F,
AMH-D,
LHO-J,
GDSTP,
HRHPP,
GABUP. CDx3 Notification Service
database,
PreferredStockInvesting.com)
In
Context: The U.S. Preferred Stock
Marketplace
So how do the ten new May
issues stack up within the context of
today’s preferred stock marketplace?
U.S.-traded preferred stocks remain in very
high demand. Coupled with the limited
success of the Fed’s efforts to increase the
cost of money, the average market price of
U.S.-traded preferred stocks has increased
by $0.98 per share this year (an annualized
value gain of 9.6 percent).
The data being charted here
is limited to call-protected issues in order
to limit the price distorting effect of an
anticipated redemption.
Beyond ratings, 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 (think upstream oil producers),
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.
While the continuing strong demand for U.S.
preferred stocks can be attributed to
several factors, the next chart makes it
pretty clear that the lack of attractive
alternatives is certainly among them.
U.S.-traded preferred stocks are currently
returning an average current yield of 7.3
percent (blue line) while the annual return
being offered to income investors by the
10-year treasury is 1.8 percent and that of
the 2-year bank CD is a meager 1.5 percent.
It is into this marketplace
that May’s ten new issues were introduced.
Income versus Value
Investing, Year-To-Date
For comparison, I have set
the Yield column in Figure 3 above to show
the current yield of the ten new May
preferreds on May 27. With an average
current yield of 7.3 percent, plus the 9.6
percent annualized YTD value gain, those
investing in U.S.-traded preferred stocks
since the beginning of 2016 are currently on
pace for a total annualized return of almost
17 percent (7.3 percent of which is realized
in dividend cash).
Those investing in common stocks, as
measured by the S&P500, have also done well
this year, seeing an unrealized annualized
value appreciation of about 10.3 percent
plus about two percent in average annualized
dividend yield.
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