New Preferred Stock
IPO’s, April 2019
Compared to March’s fourteen new preferred stock issues,
April was a quiet month. Just four new preferred stocks were introduced
April. But even with this small group, there was some diversity – two
tax-advantaged dividends while one offers an investment grade rating.
industry diversity to be found here, too – one property REIT, one
partnership and two regional banks.
As the month came to a close, the average market price for
all U.S. traded preferred stocks was $25.13, up $0.20 per share over
April’s new issues
four new preferred stocks are offering an average annual dividend
(coupon) of 6.8
percent, an average current yield (which does not consider reinvested
or capital gain/loss) of 6.8 percent and an average Yield-To-Call
consider reinvested dividends and capital gain/loss) of 6.7 percent
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
underwriters purchased the new shares from the issuing company.
special note regarding preferred stock trading symbols:
Annoyingly, unlike common stock trading symbols, the format used by
and other online quoting services for preferred stock symbols is not
For example, the Series A preferred stock from Public Storage is
TDAmeritrade, Google Finance and several others but this same security
“PSA.PR.A” at E*Trade and “PSA.PA” at Seeking Alpha. For a
table of how preferred stock symbols are denoted by sixteen popular
other online quoting services, see “Preferred
Stock Trading Symbol Cross-Reference Table.”
are currently 124 high quality preferred stocks selling for an average
$25.49 (April 30), offering an average current yield of 5.5 percent.
And 35 of
these high-quality issues are selling below their $25 par value,
average current yield of 5.4 percent. By high quality I mean preferreds
offering the characteristics that most risk-averse preferred stock
favor such as investment grade ratings and cumulative dividends.
is now a total of 909 of these securities trading on U.S. stock
(including convertible preferred stocks).
Buying new shares for
that KEYLL from KeyCorp (KEY) and RXFCL from Regions
Corporation (RF) are still trading on the wholesale Over-The-Counter
OTC trading symbols are typically temporary until these securities move
their retail exchange, at which time they will receive their permanent
there is no need to wait. Individual investors, armed
with a web browser and an online trading account, can often purchase
introduced preferred stock shares at wholesale prices just like the big
guys (see “Preferred
Stock Buyers Change Tactics For Double-Digit Returns"
an explanation of how the OTC can be used to purchase shares for
who have been following this strategy of using the
wholesale OTC exchange to buy newly introduced shares for less than $25
more able to avoid a capital loss if prices drop (if they choose to
broker will automatically update the trading symbols of any shares you
on the OTC. KEYLL will become KEY-K and RXFCL will become RF-C.
About the new issues
is an unrated traditional preferred stock from Sotherly Hotels,
(SOHO). Sotherly Hotels, Inc. owns approximately 89% of the units of
partnership interest in the company’s operating partnership, Sotherly
LP. In February 2018, the partnership issued SOHOK, an Exchange-Traded
Security (baby bond) at 7.25 percent with a February 15, 2019 call
partnership wants to redeem SOHOK, so it is selling preferred stock
Sotherly Hotels, Inc. in a private placement transaction (converting
percent debt into 8.25 percent equity on the partnership’s books).
holding the partnership’s SOHOK shares should expect a redemption
shortly. In turn, to generate the cash needed to purchase these private
placement preferred units from its operating partnership, Sotherly
issued SOHEP on April 11, paying 8.25 percent cumulative dividends.
a $105 million hotel REIT established in 2004.
is an unrated traditional preferred stock issued by Energy
Operating, LP (ET). Over the last two years there have been a variety
mergers and acquisitions that created this partnership. To summarize,
2017 Energy Transfer Partners, LP merged with Sunoco Logistics. Then on
19, 2018, Energy Transfer Partners, LP, trading as ETP, merged with
Transfer Equity, LP. With this merger, ETP changed its symbol to ET
to avoid any confusion, its name to Energy Transfer Operating, LP. ETP
preferred stocks trading at the time which kept their original trading
– ETP-D and ETP-E – and are still trading today under those symbols.
though the company’s common symbol is now ET, they requested that the
assign the symbol ETP-E to this new preferred stock. Imagine working
in their Investor Relations department. ET is using the proceeds from
issue to pay down debt. This security offers cumulative dividends using
fixed-to-float rate structure, paying 7.60 percent until its May 15,
date. The rate becomes variable at that time, using the three-month
(currently at 2.58 percent) plus 5.161 percent. Page S-23 of the
explains how the floating rate will be calculated should the 3-month
become unavailable. This $40 billion company owns and operates a
natural gas pipelines and storage facilities throughout the US and
from KeyCorp offers an investment grade rating (Baa3 from Moody’s) and
somewhat miserly 5.625 percent fixed dividend. Its comparatively low
probably explains why buyers have been discounting the price, as this
has failed to reach its $25 par value during OTC trading. The dividends
KEYLL/KEY-K are non-cumulative. KEY has two other preferred stocks
KEY-I issued in 2016 at 6.125 percent and KEY-J issued last summer at
percent. Most recently, KEY sold its insurance business to USI
producing a gain of $78 million on the sale. KeyCorp is a $17.5 billion
regional bank founded in 1849 and is headquartered in Cleveland.
is a traditional preferred stock from Regions Financial Corporation
non-cumulative dividends. RXFCL is one of three income securities
trading from Region’s, with the other two having the symbols RF-A and
RXFCL/RFP-C uses the fixed-to-floating rate structure with the dividend
being 5.7 percent until August 15, 2029. Normally, the dividend rate
preferred stocks using this rate structure begins floating on the
call date (May 15, 2029 in this case) so that the company is able to
shares if the resulting rate floats too high (can’t have that
happening). But I
believe this is the first case I have seen where the rate begins
floating on a
different date, three months after the call date in this case. By the
RF-A, paying a fixed 6.375 percent, became callable a long time ago
15, 2017), but Regions has not called it (although they certainly could
time so be careful here). While I was expecting the company to use the
of the new RXFCL/RF-C to redeem all RF-A shares, the Use of Proceeds
the prospectus says nothing about doing so. RF is a $16 billion
founded in 1852 and headquartered in Birmingham, Alabama.
Preferred stock data - CDx3 Notification Service database,
ETP-E, KEYLL/KEY-K, RXFCL/RF-C
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
paid tax on the cash that is being used to pay you or not? If not, the
going to collect the full tax from you; if so, you still have to pay
at the special 15 percent rate.
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
since the company has not (ETP-E).
incorporated as REITs (SOHEP) are required to distribute
90 percent of their pre-tax profits
to shareholders. Doing so in the form of non-voting preferred stock
is the most common method of complying and because these dividend
made from pre-tax dollars, taxable dividends received from REITs are
regular income (i.e. they do not qualify for the special 15 percent
that a company pays to those loaning the company money is a business
the company (tax deductible), so the company does not pay tax on the
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
received from ETDS’ is taxed as regular income (no ETDS' were issued
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
referred to as “Qualified Dividend Income” or QDI. QDI preferred stocks
often seen as favorable for holding in a non-retirement account due to
favorable 15 percent tax treatment. Looking at the Status column in the
table, the prospectuses for six of March’s new issues state that their
dividends are QDI-qualified (KEYLL, RXFCL).
In Context: The U.S.
preferred stock marketplace
following chart illustrates the average
market price of U.S.-traded preferred stocks over the last twelve
things affect the market prices of these securities
such as the proximity to their call or maturity date, proximity to
ex-dividend date, industry and/or overall health of the issuer,
direction of interest rates, pending government regulatory or policy
cumulative versus non-cumulative dividends and tax treatment of
payments. So what we really need to look at is current yield, which
the average annual dividend yield per dollar invested (without
re-invested dividend return or any future capital gain or loss).
is a “bang-for-your-buck” measure of value that normalizes differences
coupon rate and price to give us a single, comparable metric.
down the risk scale, the next chart compares the
average current yield realized by today’s preferred stock buyers when
to the yield earned by those investing in the 10-year Treasury note or
bank Certificates of Deposit.
preferred stocks are currently returning an average current yield of
percent (blue line) while the annual return being offered to income
by the 10-year treasury is 2.5 percent and that of the 2-year bank CD
the yield curve upside down at 2.8 percent (shorter term money very
offers a higher return than longer term money).
comparison, I have set the Yield column in the first table above to
current yield of the new April preferreds on April 30. It is into this
marketplace that April’s new issues were introduced.