PREFERRED
STOCK NEWS
Preferred
Stock Market Q2/2015: Investment Grade
Preferred Stocks Available Below $25
It’s time for
preferred stock buyers to start paying
attention. In anticipation of a September
2015 Fed interest rate hike, the average
market price of preferred stock shares fell
to $25.03 at the end of June, a drop of
$0.62 per share over the last three months.
With lower prices come more sub-$25
candidates paying higher returns – the
hallmark of a classic buyer’s market.
With the second quarter of 2015 behind us, the
number of investment grade preferred stocks
selling for a market price below $25 is now at
76, up from 39 candidates at the end of Q1.
The Preferred Stock
Market, Q2/2015
The similarities
between the preferred stock market of 2013 and
that of 2015 are hard to miss. In both cases,
preferred stock prices started the year in the
high-$26 range with pundits forecasting a change
in Fed policy to begin increasing the federal
funds rate. Also in both cases, those forecasts
were largely ignored by preferred stock
investors until the summer rolled around and Fed
officials started hinting that their September
meeting would bring the long-awaited change.
With those statements in 2013, preferred stock
prices started to fall, dropping below $26 in
June of that year, just like last month, as
shares cleared their quarterly ex-dividend
dates.
This Preferred Stock Market Snapshot™ chart
depicts the preferred stock marketplace at the
end of Q2/2015 using 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, 308 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 three
months. As prices have fallen since the end of
Q1, the percentage of the market occupied by
investment grade securities that are priced
below $25 has increased to 25 percent, up
substantially from 12 percent.
(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): AGO-E,
HSEA, ALLY-B and GDP-D.
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 three of these four securities have
exceeded their call dates (YTC and EAR are not
able to be calculated in those cases).
Founded in 2003, Assured Guaranty Ltd. (AGO) is
a $3.6 billion (market cap) Bermuda-based
insurer and reinsurer of a wide variety of debt
obligations. The company currently has three
income securities trading – AGO-B, AGO-E and
AGO-F (originally issued by Financial Security
Assurance Holdings, acquired by AGO in 2009) -
all of which have been redeemable for several
years. This security offers a 6.250 percent
annual dividend (coupon), paying $0.39 per share
each quarter. AGO-E, 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). Of the 76 investment grade
securities that are currently trading below
their $25 par values, AGO-E is offering the
highest current yield at 6.48 percent, closing
at $24.13 on June 29.
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 $26.08 market price
exposes buyers to a $1.08 capital loss in the
event of a redemption of HSEA shares.
ALLY-B is a traditional preferred stock
introduced in March 2011 at 8.50 percent by Ally
Financial (ALLY). To help avoid some confusion,
even though the trading symbol is denoted as
“-B” and is the only preferred stock currently
offered by the company, the prospectus
description refers to this security as “Series
A,” a rare disconnect between the symbol
assigned by the NYSE and the description
provided by the company. Ally was originally
founded in 1919 as GMAC, specializing in
financial products to car dealers and buyers. At
Caa1, ALLY-B is well into Moody’s speculative
grade rating scale which explains the 8.02
percent current yield for this security. Of the
41 million shares issued with ALLY-B, the
company announced a tender offer for 13 million
shares on May 20, 2015. Trading at $26.49,
today’s buyers are exposed to a $1.49 per share
capital loss in the event of a redemption.
GDP-D is a traditional preferred stock offering
cumulative dividends and was introduced in
August 2013 by Goodrich Petroleum (GDP) at 9.75
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 began selling assets last December
in order to meet its cash obligations (see “Goodrich
shares slump after company says to explore sale
of shale asset”). GDP-D started last
October at $25.55 per share but dropped to $6.50
on June 29. The more risk-tolerant among us
might consider GDP-D as a capital gain
opportunity, assuming that the company is able
to survive (or be acquired). Note that, like
HSEA, GDP-D is designated as paying Qualified
Dividend Income (QDI).
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
AGO-E |
HSEA |
ALLY-B |
GDP-D).
What’s next?
Falling prices is great news for preferred
stock buyers, but not so much for those who
have treated an income investment using
value investing strategies. For the last
several years, as prices have been
artificially propped up by the Fed’s
monetary policy, I have issued frequent
reminders to use the wholesale
Over-The-Counter stock exchange for new
purchases (see “Preferred
Stock Buyers: Time To Change Tactics For
Sub-$25 Purchases”, July 14, 2014).
Doing so has allowed preferred stock buyers
to purchase newly introduced preferred stock
shares for sub-$25 wholesale prices; these
are the same shares that those who waited to
use the retail NYSE paid a much higher price
for.
But the advantage of using the OTC will
erode as retail prices continue to fall and
sub-$25 shares become more widely available;
the difference between wholesale OTC prices
and retail NYSE prices will diminish
substantially.
As history suggested, June 2015 was the
month that preferred stock sellers reached
their tipping point and started selling
their shares in anticipation of a September
hike in the federal funds rate (see “Preferred
Stock Buyers - History Suggests That June
Could Bring Higher Returns For Lower Prices”,
June 1, 2015). The average market price of
the highest quality preferred stocks
(cumulative dividends, investment grade
ratings, call-protected, etc.) fell $0.33
during June alone, delivering the highest
returns for such securities that we have
seen since last year to today’s buyers.
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