New Preferred Stock
IPO’s, August 2019
After holding off during July to see if the Fed was going to
reduce interest rates, preferred stock issuers crept back into the
market with five new issues introduced throughout August.
In anticipation of a drop in rates, buyers and those seeking
to reduce their risk continued to push up the prices of previously
issued higher payers. As the month came to a close, the average market
price for all U.S.-traded preferred stocks was $25.80, up $0.08 per
share over the last month.
August’s new issues
five 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 5.4 percent (using August 30 prices).
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 125 high quality preferred stocks selling for an average
$26.40 (August 30), offering an average current yield of 5.3 percent.
And one of
these high-quality issues is selling below its $25 par value,
average current yield of 5.0 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 916 of these securities trading on U.S. stock
(including convertible preferred stocks).
About the new issue
ALL-H is a 46 million share issue from Allstate Corp. (ALL), the
insurer’s eighth preferred stock issue currently trading and the second
since March 2018. ALL-H offers double investment grade ratings. The
5.100 percent dividends are non-cumulative and the shares become
callable on October 15, 2024. Several of Allstate’s preferreds are
trading beyond their call dates, including ALL-A (5.625%), ALL-D
(6.625%) and ALL-F (6.625%). These three securities were issued at 10m
shares, 26m shares and 10m shares, respectively. A total of 46m shares.
While there has been no formal announcement, it would not be surprising
for Allstate to announce the redemption of ALL-A, ALL-D and ALL-F
AHL-E is a double-investment grade preferred stock from Aspen
Insurance Holdings Limited, an insurance and reinsurance company. While
the company was taken private in February of this year as part of its
acquisition by Apollo Global Management, their three preferred stocks,
none of which are currently redeemable, remain publicly traded. Based
in Bermuda, Aspen may have an opportunity to exercise its claim-paying
ability as hurricane Dorian does what hurricanes do to the American
southeast. AHL-E pays 5.625 percent non-cumulative dividends.
was introduced by New Residential Investment Corp. (NRZ) on
August 8, just six weeks after introducing NRZ-A on June 25. The
introduction of NRZ-B is what the company referred to as “an
opportunistic introduction,” taking advantage of a dip in interest
rates. Specifically, NRZ-A was introduced on June 25 at 7.5 percent
followed by NRZ-B, just six weeks later, at 7.125 percent. NRZ-B is an
unrated traditional preferred stock offering cumulative dividends. The
rate will remain fixed at 7.125 percent until this security’s August
15, 2024 call date. At that time, the coupon will float based on the
three-month LIBOR rate plus 5.640 percent. NRZ is a $6.4 billion
mortgage REIT founded in 2011.
MBINO from Merchants Bancorp (MBIN) is another case of interest rate
opportunism as MBINO is Merchants’ second new preferred stock issued in
just over four months. MBINP, introduced in March at 7.000 percent, has
now been followed by MBINO at 6.000 percent, a full percentage point
lower. MBINO is an unrated traditional preferred stock paying
non-cumulative 6.0 percent dividends using the fixed-to-float rate
structure. The rate becomes variable on the security’s October 1, 2024
call date, using the three-month LIBOR plus 4.569 percent. Page S-14 of
the prospectus explains how the floating rate will be calculated should
the 3-month LIBOR become unavailable. Merchants is a $543 million
regional bank headquartered in Indiana with 14 offices. The bank was
established in 1990.
to miss the opportunity, Brookfield Property Partners LP (BPY)
introduced BPYPO on August 13 just five months after its
introduction of BPYPP last March. Where BPYPP carries a 6.5 percent
coupon, the new BPYPO was introduced at 6.375 percent. BPYPO’s 6.375
percent dividends are cumulative and offer a BB+ speculative grade
rating from S&P. This issuer is a partnership so holders of their
preferred stock units will receive at least one K-1 at tax time (rather
than form 1099). In what had to be good news to BPY, Sears announced
additional store closures earlier this month including stores in eight
high-demand REIT-owned malls, four of which are owned by Brookfield.
BPY is a $17 billion commercial real estate company headquartered in
Preferred stock data - CDx3 Notification Service database,
Prospectus: ALL-H, AHL-E, NRZ-B, MBINO, BPYPO
Preferred Stock Tax treatment
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.
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 full tax since the company has not (BPYPO).
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
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. 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 (there were no ETDS' issued during August).
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 (ALL-H, AHL-E, MBINO).
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 1.5 percent and that of the 2-year bank CD
the yield curve upside down at 2.5 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
show the current yield of the new August preferreds on August 30. It is into
this marketplace that August’s new issues were introduced.