PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, November 2018
The Federal Open Market
Committee is scheduled for a two-day meeting
December 18 and 19 and is widely expected to
increase the federal funds rate for the
fourth time this year.
As rates go up, market prices of fixed-return
income securities (preferreds, bonds) come down,
creating a buyer-friendly market for preferred
stock investors.
For preferred stock buyers,
upward pressure on interest rates boosts the
dividends paid by new issues, increasing your
income, and lower prices bring not only cash
savings on your share purchases but higher
yields since you earn the same dividend income
without having to invest as much of your cash;
your income, cash balance and yield all respond
favorably to the Fed’s interest rates increases.
I’ll show you a chart of this
shortly, but in response to increasing rates,
the average market price of U.S.-traded
preferred stocks fell by $1.89 per share this
year, now sitting at $23.79, creating the best
opportunity for preferred stock buyers that we
have seen since 2016.
Importantly, note that $23.79 is
below these securities’ $25 par value. Remember
that the par value is what shareholders will
receive in cash should the issuing company
decide to redeem your shares so buying shares
below par sets you up for a downstream capital
gain on top of the regular dividend income
provided by these securities.
November’s new issues
November’s five new preferred
stocks are offering an average annual dividend
(coupon) of 7.3 percent compared to 7.0 percent
from October’s new issues.
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.
Regarding BHRPP: Notice that I am
using the temporary OTC symbol BHRPP for the new
preferred stock from Braemar Hotels and Resorts
(BHR). By the time you read this, this security
will probably have started trading under its
permanent NYSE symbol BHR-D. If you are looking
for information on this security, be extra
careful that you are using the current symbol.
A special note regarding
preferred stock trading symbols: Annoyingly,
unlike common stock trading symbols, the format
used by exchanges, brokers and other online
quoting services for preferred stock symbols is
not standardized. For example, the Series A
preferred stock from Public Storage is “PSA-A”
at TDAmeritrade, Google Finance and several
others but this same security is “PSA.PR.A” at
E*Trade and “PSA.PA” at Seeking Alpha. For a
cross-reference table of how preferred stock
symbols are denoted by sixteen popular brokers
and other online quoting services, see “Preferred
Stock Trading Symbol Cross-Reference Table.”
There are currently 126 high
quality preferred stocks selling for an average
price of $23.21 (November 30), offering an
average current yield of 6.0 percent. And 95 of
these high quality issues are selling below
their $25 par value, also offering an average
current yield of 6.0 percent. By high quality I
mean preferreds offering the characteristics
that most risk-averse preferred stock investors
favor such as investment grade ratings and
cumulative dividends.
There are now a total of 897 of
these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying
new shares for wholesale
Note that BHRPP from Braemar
Hotels and Resorts and ESGRL from Enstar Group (ESGR)
are still trading on the wholesale
Over-The-Counter exchange (see above note
regarding BHRPP). These are temporary OTC
trading symbols until these securities move to
their retail exchange (NYSE and NGS,
respectively), at which time they will receive
their permanent symbols.
But there is no need to wait.
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).
Those who have been following
this strategy of using the wholesale OTC
exchange to buy newly introduced shares for less
than $25 are more able to avoid a capital loss
if prices drop (if they choose to sell).
Your broker will automatically
update the trading symbols of any shares you
purchase on the OTC. BHRPP will become BHR-D and
ESGRL will become ESGRO.
About
the new issues
GLADD from Gladstone Capital
Corporation (GLAD) is an unrated Exchange-Traded
Debt Security (green font in the above table)
offering a 6.125 percent coupon. ETDS’ are bonds
recorded on the company’s books as debt (rather
than as equity, as in the case of preferred
stock). As debt, the obligation to pay the
interest on these bonds is cumulative. As bonds,
ETDS’ are often seen as having lower risk than
the same company’s preferred stock shares. ETDS
are very similar to preferred stocks and are
often listed on brokerage statements as such.
Gladstone is incorporated as a business
development corporation, investing in small to
middle-market companies. GLADD was introduced on
November 1, ten days prior to the company’s
November 11 quarterly filing. The filing
disclosed that FDF Energy, which GLAD has a
significant stake in, filed for bankruptcy on
September 29. GLADD is the company’s second ETDS
offering within the last fourteen months.
GLOP-C, issued by GasLog Partners
LP (GLOP) offers the fixed-to-float rate
structure and pays a fixed 8.5 percent dividend
until its March 15, 2024 call date. The rate
becomes variable at that time, calculated by
adding 5.317 percent to the then-current
three-month LIBOR rate. GasLog, founded in 2014
and headquartered in Monaco, charters its fleet
of twelve LNG tankers. With multi-year leases,
it is unclear how shorter-term energy price
fluctuations affect the company. GLOP-C is the
company’s third income security issued within
the last eighteen months, with two new issues
this year. Note that GasLog is structured as a
foreign limited partnership. Those considering
buying GLOP-C shares should consult a tax
specialist regarding the taxation and reporting
requirements of income from such securities.
WHFBZ, an Exchange-Traded Debt
Security, was issued by WhiteHorse Finance, Inc.
(WHF) on November 8 but did not start trading on
the NGS exchange until November 30. WhiteHorse
has a market cap of $270 million and is
incorporated as a business development company
providing debt financing to small, privately
held companies. WHFBZ raised about $33 million
with which the company intends to further its
invested portfolio and reduce Credit Facility
debt.
BHRPP/BHR-D from Braemar Hotels
and Resorts (BHR) is an unrated traditional
preferred stock offering 8.25 percent dividends.
Dividends from BHR-D are cumulative meaning that
if the company misses a dividend payment to you,
they still owe you the money (their obligation
to pay you accumulates). In January 2017 the
company announced a revised strategy to realign
its hotel portfolio around luxury properties.
That announcement has been followed by a series
of well-timed property sales, acquisitions and
upgrades. According to Smith Travel Research,
2018 revenue per available room for luxury-class
properties is up 4.9 this year, compared to 3.1
percent for the industry overall. On the
downside, hurricane Irma significantly damaged
BHR’s Ritz-Carlton St. Thomas with the company
working through $3.8 million in insurance
recoveries on the property during the last
quarter.
ESGRL/ESGRO comes from Enstar
Group Limited (ESGR). This security offers a BB+
S&P rating with a fixed 7.0 percent coupon
paying non-cumulative dividends. Enstar, founded
in 2001, is a diversified international
insurance company with a $3.8 billion market cap
and is headquartered in Bermuda. North American
hurricanes usually mean bad news for property
and casualty insurers, with those based in
Bermuda getting a front row seat. On the upside,
Enstar has some pretty solid financials with
impressive profitability and net cash flow.
ESGRL/ESGRO is the company’s second income
security issued within the last five months.
Sources: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses:
GLADD,
GLOP-C,
WHFBZ,
BHR-D,
ESGRL/ESGRO
Tax
treatment
The tax treatment of the income
you receive from income securities can be a bit
confusing, but it really boils down to one
question – Has the company already paid tax on
the cash that is being used to pay you or not?
If not, the IRS is going to collect the full tax
from you; if so, you still have to pay tax, but
at the special 15 percent rate.
Traditional preferred stock
dividends are typically paid out of pre-tax
profits so are taxable as regular income; you
pay the full tax since the company has not
(BHR-D).
Companies incorporated as REITs
are required to distribute at least 90 percent
of their pre-tax profits to shareholders. Doing
so in the form of non-voting preferred stock
dividends is the most common method of complying
and because these dividend payments are made
from pre-tax dollars, dividends received from
REITs are taxed as regular income (i.e. they do
not qualify for the special 15 percent dividend
tax rate).
Interest that a company pays to
those loaning the company money is a business
expense to the company (tax deductible), so the
company does not pay tax on the interest
payments it makes to its lenders (i.e. interest
payments made to lenders are paid with pre-tax
dollars). Since Exchange-Traded Debt Securities
are debt (GLADD, WHFBZ), ETDS shareholders are
on the hook for the taxes. Income received from
ETDS’ is taxed as regular income.
Lastly, if a company pays your
preferred stock dividends out of its after-tax
profits, the dividend income you receive is
taxed at the special 15 percent tax rate. Such
dividends are referred to as “Qualified Dividend
Income” or QDI. QDI preferred stocks are often
seen as favorable for holding in a
non-retirement account due to the favorable 15
percent tax treatment. Looking at the Status
column in the above table, the prospectuses for
two of November’s new issues state that their
dividends are QDI-qualified (GLOP-C from GasLog
Partners and ESGRL/ESGRO from Enstar Group).
In
Context: The U.S. preferred stock marketplace
The following chart illustrates
the average market price of U.S.-traded
preferred stocks over the last twelve months.
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, 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 the 10-year Treasury note or 2-year bank
Certificates of Deposit.
U.S.-traded preferred stocks are
currently returning an average current yield of
7.2 percent (blue line) while the annual return
being offered to income investors by the 10-year
treasury is 3.0 percent and that of the 2-year
bank CD has caught up to the 10-year treasury
once again at 3.0 percent.
For comparison, I have set the
Yield column in the first table above to show
the current yield of the new November preferreds
on November 30. It is into this marketplace that
November’s new issues were introduced.
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