PREFERRED
STOCK NEWS
Preferred
Stock Market Q1/2015: Investment Grade
Preferred Stocks Available Below $25
With the first
quarter of 2015 behind us, the number of
investment grade preferred stocks selling
for a market price below $25 is now at 39.
While 39 candidates is much lower than the
98 we had last year at this time, it is
still plenty for preferred stock buyers to
pick from.
In early-2014, preferred stock investors
were certain that as the Fed tapered out of
its QE bond-buying program, interest rates
would go up. After all, when the Fed
launched QE with the objective of lowering
rates, the program worked so it seemed
reasonable that backing out of QE would have
the opposite effect.
In anticipation of higher rates, the average
market price of preferred stock shares fell
to $24.53 at the end of Q1/2014, pushing up
the number of investment grade candidates
that were selling below their par value ($25
in most cases) to 98.
The Preferred Stock
Market, Q1/2015
As we now
know, the expected rate increase did not
materialize as the Fed exited their QE
program. The price drop that we saw during
early-2014 turned out to be short-lived.
Average preferred stock prices now sit at
$25.65 per share, up $1.12 over the last
twelve months.
This Preferred Stock Market Snapshot™ chart
depicts the preferred stock marketplace at
the end of Q1/2015 along with two
characteristics that are usually high on the
list of considerations for risk-averse
preferred stock investors - current market
price (above and below these securities' $25
par value) and investment risk (as reflected
by investment grade versus speculative grade
Moody's ratings).
Each diamond
represents a preferred stock. The sweet spot of
the preferred stock marketplace is depicted in
the green lower-left quadrant - investment grade
preferreds selling for a market price below
their $25 par value.
While there are currently 894 preferred stocks
trading on U.S. stock exchanges, 319 meet the
criteria listed under the chart. The arrow in
the table below the chart points to the
migration that we have seen over the last year.
As prices have increased since the end of
Q1/2014, the percentage of the market occupied
by investment grade securities that are priced
below $25 has fallen to 12 percent, down from 31
percent a year ago.
(Source: CDx3 Notification Service database,
PreferredStockInvesting.com)
Maximum Yield
Candidates
The purple
diamonds on the above chart identify the four
preferred stocks that are offering the maximum
current yield from each quadrant (not to be
taken as recommendations): CTY, HSEA, MHO-A and
GDP-C.
Note that for
comparison purposes, I have selected Current
Yield (CY) for the Yield column rather than
Yield-To-Call (YTC) or Effective Annual
Return (EAR) since two of these four
securities have exceeded their call dates (YTC
and EAR are not able to be calculated in
those cases).
CenturyLink’s (CTL) CTY would interest
preferred stock investors looking for
competitive multi-year income production
with relatively low investment risk. Issued
in May, 2013, CTY offers a Baa3 investment
grade rating and cannot be redeemed by
CenturyLink until June 1, 2018. This
security offers a 6.125 percent annual
dividend (coupon), paying $0.38 per share
each quarter. CTY closed at $25.00 on March
31. CTY, presented here in green font, is an
Exchange-Traded Debt Security (ETDs). ETDs
are very similar to preferred stocks and are
often labeled as such, but they are actually
bonds that trade on the stock exchange
(rather than the bond market). ETDs offer
cumulative dividends and are recorded on the
company’s books as debt rather than equity.
As bonds, ETDs are generally seen as having
less investment risk than the same company’s
preferred stocks (see “Preferred
Stock Investors: 'Exchange Traded Debt
Securities' Offer Same Reward, Lower Risk”,
March 20, 2012). At 6.13 percent, CTY has
the highest current yield of today’s
investment grade securities that are trading
below their $25 par values.
HSEA is a trust preferred stock (TRUPS)
introduced by Britain’s largest bank, HSBC
Holdings PLC (HSBC), at 8.125 percent in
April 2008 and has been callable since April
15, 2013. Note that HSEA offers Qualified
Dividend Income (QDI) to individual
investors (but not to corporate investors
since HSBC is a foreign company). As a TRUPS,
HSEA provides cumulative dividends but
today’s buyers should be sure to read the
prospectus of this security since the
issuer, at their option and at any time, is
able to convert these cumulative HSEA shares
into non-cumulative “dollar preference
shares.” Today’s buyers may also have to
find a way to overlook the $1.92 billion
fine that HSBC was required to pay in
late-2012 for providing illegal banking
services to the world’s drug cartels (see “Bleak
day for British banking as Libor arrests
follow record fine for HSBC”, The
Guardian, December 11, 2012) and the bank’s
role in the LIBOR manipulation scandal more
recently, the settlement to which the bank
may be reneging on (see “U.S.
May Revoke Settlement Agreements in
Currency-Rigging Probes”, Bloomberg,
March 17, 2015). Today’s $26.24 market price
exposes buyers to a $1.24 capital loss in
the event of a redemption of HSEA shares.
MHO-A is a traditional preferred stock
introduced in March 2007 at 9.75 percent by
M/I Homes, Inc. (MHO). M/I Homes was founded
in 1973 and develops single family homes
throughout the United States. At Caa1, MHO-A
is well into Moody’s speculative grade
rating scale which explains the 9.52 percent
current yield for this security.
Shareholders were caught short during the
summer of 2008 when the company suspended
the dividends on these non-cumulative
shares. Dividend payments were resumed in
June 2013. Trading at $25.60, today’s buyers
are exposed to a $0.60 per share capital
loss in the event of a redemption (MHO-A
became callable on April 10, 2013).
GDP-C is a traditional preferred stock
offering cumulative dividends and was
introduced in April 2013 by Goodrich
Petroleum (GDP) at 10.0 percent. Its Caa2
rating is so low that this security is
barely hanging onto the low end of the
Moody’s scale. The early-October, 2014
plunge in global oil prices showed up
quickly in the market prices for
energy-related securities, especially
upstream producers such as Goodrich. The
company is currently looking to sell assets
in order to meet its cash obligations (see “Goodrich
shares slump after company says to explore
sale of shale asset”). GDP-C started
last October at $26.30 per share but dropped
to $7.81 on March 31. The more risk-tolerant
among us might consider GDP-C as a capital
gain opportunity, assuming that the company
is able to survive (or be acquired). Note
too that GDP-C is a QDI-designated security.
These four
securities from four vastly different
companies are offering the maximum current
yields in the four key quadrants depicted by
the Preferred Stock Market Snapshot™ chart.
(Source: SEC
prospectus filings for
CTY |
HSEA |
MHO-A |
GDP-C)
What’s next?
The largest
crude oil storage facility in North America,
located at Cushing, Oklahoma, was
three-quarters empty last September. Since
then, the amount of crude at Cushing has
tripled and the facility is expected to be
full by Memorial Day, the growing supply
pushing oil prices down.
Oil prices are reflected in the cost of all
things that need to be manufactured or
transported (which is essentially all
things), so falling oil prices reduce
inflation pressures substantially. With less
inflation pressure, the Fed is less likely
to begin raising interest rates than they
would be otherwise. And as long as interest
rates remain artificially low, as held down
by Fed monetary policy, the market prices of
income securities such as preferred stocks
are likely to remain artificially high.
Until the Fed starts backing out of our
market, which from my perspective cannot
happen soon enough, preferred stock
investors will need to look harder to find
high quality preferred stocks in today’s
market for sub-$25 prices.
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