PREFERRED
STOCK NEWS
Preferred stock
buyers benefit from global equity scare
The
big bump in preferred stock dividend yields during December prevented
new preferred stocks from being introduced. With
rates spiking up, underwriters are unable to accurately set the coupon
rate for new issues. For the first time since August 2013, we went a
month without any new preferreds to consider.
Econ 101 teaches us
that leaving cash with employers stimulates
employment which, in turn, generates more tax revenue. Last year's tax
break has demonstrated this simple mechanism again. The December
13 Monthly Treasury Report reported that for the first two months of
fiscal 2019 (Oct/Nov) the U.S. Treasury collected record tax revenue
exceeding $458 billion, the largest haul coming from
corporate income and payroll taxes. For the same two month period,
corporate income tax collections jumped from
$1.5 billion last year to $6.3 billion this year.
Conversely, French
president Emmanuel Macron won 2017's election on the
promise of fixing a sluggish economy with ten percent unemployment.
Attempting to do so with a series
of tax increases, culminating with a massive transportation tax hike,
the French economy went from bad to worse forcing the French middle
class into
the streets in violent protest. How making it more
costly to move products and consumers to market would stimulate
economic
growth remains unexplained.
But according to Bloomberg News, the French economic meltdown
was
just
one of three primary events that caused investors to sell equity
positions worldwide during December - Brexit uncertainty and a
significant slowdown in China joined the French turmoil to form the
perfect storm. The result being that investors moved cash out of stocks
globally and into U.S. treasuries.
Since
cash was flowing into U.S. treasuries, prices went up for those
securities, dropping
their yields.
December's global equity selloff included U.S. preferred
stocks,
pushing average prices down by $0.67 throughout the month. That price
drop pushed up preferred stock yields substantially (now at 7.36%),
delivering a
spectacular end-of-year bonus to today's preferred stock buyers.
The
two charts above illustrate the resulting rare market condition where
preferred
stock yields are rising while treasury yields are falling. While
preferred
stocks are providing increasing yields to their buyers, treasury
investors find
themselves settling for sub-3% returns.
99 high quality
preferred stocks now below $25
One
of the many preferred stock market metrics I collect and publish every day is the number of preferred stock
“bargains” available to preferred stock investors.
These bargains are the highest quality preferred stocks
selling for a market price that is below these security’s $25 par
value. By high quality I mean those preferred stocks with the
characteristics that most risk averse
investors favor – investment grade ratings, cumulative dividends and
the like.
In the event of a future call, the issuing company of a
preferred stock
is required to pay shareholders the security’s par value ($25 per
share) in
cash, so buying preferred stock shares below their $25 par value
positions you
for a future capital gain (on top of the regular dividend income you
receive in
the meantime).
The
next chart illustrates the number of high-quality preferred stocks
selling
below their $25 par value each day throughout 2018. Beginning the year
at 37
issues and reaching a peak of 107 on December 27, there were 99 high
quality preferred
stocks selling for a price below their $25 par value as December came
to an end.
These
99 high quality issues are offering an average current yield of 6.1
percent for
the consideration of preferred stock investors. Preferred stock buyers
have not
had a buying opportunity like this since December 2013.
As
nice as it is, this is a condition that is very unlikely to last.
History has
shown us over and over that once the initial panic subsides, investors
tend to
move their cash out of treasuries and back into higher-paying
alternatives,
starting with those offering relatively low risk, namely corporate
bonds and high-quality
preferred stocks.
Preferred
stock buyers are looking at a very exciting start to the new year.
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