PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, May 2019
The yield curve tipped upside down during May, with
longer-term treasuries now paying less than shorter-term notes. The
downward pressure on longer-term yields spilled over into the U.S.
preferred stock marketplace, pushing prices of U.S.-traded preferred
stocks up with strong demand. For the first time in quite a while,
seven preferred stocks traded over 500,000 shares on Friday, May 31
with two issues trading over one million shares on that day (the
average daily volume for U.S.-traded preferred stocks runs around
35,000 shares).
As the month came to a close, the average market price for
all U.S. traded preferred stocks was $25.19, up $0.06 per share over
the last
month.
May’s new issues
May’s
six new preferred stocks are offering an average annual dividend
(coupon) of 6.1 percent, an average current yield (which does not
consider reinvested dividends or capital gain/loss) of 5.9 percent and
an average Yield-To-Call (which does consider reinvested dividends and
capital gain/loss) of 5.7 percent (using May 31 prices).
Note that TRCBP from Tristate Capital Holdings (TSC)
will trade on the NASDAQ Global Select exchange. While introduced on
May 22, this security had yet to start NGS trading on May 31 under this
NGS symbol, so the Last Price and Yield values are shown as zero in the
above table.
Also, 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.
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 122 high quality preferred stocks selling for an average
price of
$25.46 (May 31), offering an average current yield of 5.4 percent.
And 25 of
these high-quality issues are selling below their $25 par value,
offering an
average current yield of 5.0 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
is now a total of 908 of these securities trading on U.S. stock
exchanges
(including convertible preferred stocks).
About the new issues
NRUC
is a double-investment grade Exchange-Traded Debt Security
offered by National Rural Utilities Coop Finance Corporation. NRUCFC is
a cooperative of rural electric utilities, formed for the purpose of
providing cost-efficient financial services and products to its member
utilities. As a member cooperative, the company is not publicly traded
although its new ETDS is. Offering cumulative 5.5 percent interest,
market participants have priced this baby bond above its $25 par value
every day since it began trading in early-May. NRUC is the coop’s only
income security currently trading and raised $250 million. According to
the company’s Q3 10Q filing for the quarter ending February 2019, a
mark-to-market revaluation of its assets (existing loans to members)
resulted in a net loss of $71 million due to interest rate changes from
a year earlier. But loan demand from members totaled $26 billion, an
increase of $839 million from May 31, 2018.
RILYO
from B. Riley Financial (RILY) is an unrated Exchange-Traded
Debt
Security offering a 6.750 percent coupon. RILYO is the company’s sixth
ETDS offered
within the last three years, its third within the last twelve months.
B. Riley
always strikes me as a company that has a hard time saying no. Its most
recent
acquisition was that of magicJack VocalTec, a company that manufactures
a voice
over IP telephone device. The $519 million company is in a multitude of
businesses from financial services, retail store liquidation, internet
domain
and email hosting and, now, magicJack. Founded in1973, B.Riley is
headquartered
in Woodland Hills, California.
AGM-D
is a 5.7 percent traditional preferred stock offered by
Federal
Agricultural Mortgage Corporation (AGM), also known as Farmer Mac.
While AGM
now has four income securities trading, AGM-D is the first issue since
2014.
The proceeds from the new AGM-D are being used to redeem all
outstanding shares
of the 6.875 percent AGM-B on June 12, 2019, producing a dividend
expense
savings of about $800K per year. AGM-D is unrated and offers
non-cumulative
dividends. AGM is “a federally chartered instrumentality of the United
States
of America” and provides a variety of financial services to
agricultural
entities. AGM was founded in 1987 and is headquartered in Washington
D.C.
SR-A
is a traditional preferred stock from Spire Inc. (SR) offering
an
investment grade S&P rating (BBB) and 5.9 percent cumulative
dividends.
Cumulative means that if the issuing company misses a dividend payment
to you,
they still owe you the money; their obligation to pay you accumulates.
This new
issue was perhaps the most popular with investors among May’s new
offerings,
trading above $25.50 since it began trading. The company intends to use
the
$250 million raised by this new preferred stock to “(i) refinance
long-term and
short-term holding company debt and (ii) fund capital expenditures at
both the
utility and gas-related businesses.” Spire, a $4.3 billion regulated
gas utility,
provides natural gas to about 1.7 million residential, commercial and
industrial customers across Missouri, Alabama and Mississippi. Previous
known as
Laclede Group, the company was founded in 1857 and is headquartered in
Saint
Louis.
AQNB
is an ETDS from Algonquin Power & Utilities Corporation
(AGN)
offering 6.2 percent in cumulative annual interest and a BB+ rating
from
S&P. The coupon uses the fixed-to-float structure, so the interest
rate
paid by this security will become variable on the security’s July 1,
2024 call
date. This security is somewhat unique in how it treats the floating
rate
period; you might say that the floating rate period itself floats. From
July 1,
2024 to July 1, 2029 the interest rate will be calculated as the
three-month
LIBOR plus 4.01 percent. After that, the rate changes to the
three-month LIBOR
plus 4.26 percent. Then on July 1, 2049 the rate changes again,
calculated as
the three-month LIBOR plus 5.01 percent. The LIBOR, remember, is
scheduled to
be replaced by 2021 so if you hold shares of this security beyond 2021,
determining whether or not you are receiving the correct interest
payment each
quarter is going to require some work. AGN, founded in 1988, is a $5.7
billion
utility based in Oakville, Ontario Canada and provides a variety of
regulated
and non-regulated electric, gas and water services throughout Canada
and the
United States.
TRCBP
is from Tristate Capital Holdings, Inc. (TSC), offering non-cumulative
dividends. This security uses the fixed-to-float dividend rate
structure, paying
6.375 percent until its July 21, 2024 call date. The rate becomes
variable at
that time, using the three-month LIBOR rate (currently at 2.58 percent)
plus 4.088
percent. Page S-12 of the prospectus explains how the floating rate
will be
calculated should the 3-month LIBOR become unavailable. Tristate is a
$640
million regional bank, providing banking services in Cleveland,
Philadelphia,
New York City and Edison, New Jersey. The bank’s financial results are
impressive, with net income running around 35 percent of gross revenue
for the
last four quarters, generating about $245 million in cash at the end of
the
March 2019 quarter. Tristate was founded in 2006 and is headquartered
in
Pittsburgh.
Sources:
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses:
NRUC,
RILYO, AGM-D, SR-A, AQNB,
TRCBP
Preferred Stock Tax treatment
The
2017 Tax Relief Act included a provision aimed at small businesses that
also delivers an enormous benefit to those holding shares of preferred
stocks issued by REITs (which is pretty much all of us). Most small
businesses are incorporated as a Limited Liability Corporation (LLC).
Under this structure, the company’s earnings are passed through to the
owners who then pay the tax on their personal returns. The Act allows
those receiving such income to deduct, right off the top, up to twenty
percent of this “pass-through income.”
But remember that REITs do the same thing as LLC’s – at least 90
percent of a REIT’s earnings are passed to the REIT’s shareholders
primarily in the form of preferred stock dividends; the shareholders
then pay the tax on their personal returns. In other words, preferred
stock dividends received from REITs qualify under the Act’s
“pass-through income” provision and are therefore up to twenty percent
deductible. Such income is reported to you on the 1099 for received
from your broker as “Section 199A” income.
The
tax treatment of the taxable 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 paid by partnerships as pass-through income
or are otherwise
paid out of pre-tax profits are taxable as regular income; you pay the
full tax
since the company has not (none
of these were issued during May).
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, taxable dividends received from REITs are
taxed as
regular income (i.e. they do not qualify for the special 15 percent
dividend
tax rate). There
were no REIT-issued preferred stocks during May.
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, ETDS shareholders are on the hook for the
taxes. Income
received from ETDS’ is taxed as regular income (NRUC,
RILYO, AQNB).
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 six of March’s new issues state that their
dividends are QDI-qualified (AGM-D,
SR-A, TRCBP).
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
6.7
percent (blue line) while the annual return being offered to income
investors
by the 10-year treasury is 2.5 percent and that of the 2-year bank CD
has turned
the yield curve upside down at 2.9 percent (shorter term money very
rarely
offers a higher return than longer term money).
For
comparison, I have set the Yield column in the first table above to
show the
current yield of the new May preferreds on May 30. It is into this
marketplace that May’s new issues were introduced.
|
to the