PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, March 2016
Preferred stock investors
were treated to the highest number of new
introductions during March 2016 than any
other month since September 2014. There were
eleven new preferred stocks issued during
the month, bringing the total number of
these securities trading on U.S. stock
exchanges to 898.
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.
Anxious to sell the new shares, underwriters
will generally sell to broker/dealers who
sell them to us within a few days of the IPO
date.
In addition to offering a relatively robust
field to pick from, the eleven new March
issues are from a diverse group of
industries including banks: HBANO from
Huntington Bancshares (HBAN), BOFIL from
BOFI Holding (BOFI) and BBT-H from BB&T
Corp. (BBT); property REITs: STAG-C from
Stag Industrial (STAG) and SHO-E from
Sunstone (SHO); insurers: AFSI-E from
AmTrust (AFSI) and WRB-C from W.R. Berkley
(WRB); utilities: SCE-K from Southern
California Edison (SCE) and ENO from Entergy
New Orleans; and asset management: GBQTP
from Gabelli and KKR-A from KKR & Company (KKR),
a master limited partnership.
Note that Gabelli’s GBQTP,
just introduced on March 28, is still
trading on the Over-The-Counter exchange.
GBQTP is a temporary trading symbol until
this security moves to the NYSE as GAB-J
(see "Preferred
Stock Buyers Change Tactics For Double-Digit
Returns" for an explanation of how
the OTC can be used to purchase shares for
discounted prices during a period of high
preferred stock prices).
(Sources: Prospectuses
BBT-H,
SCE-K,
WRB-C,
SHO-E,
BOFIL,
AFSI-E,
STAG-C,
KKR-A,
HBANO,
ENO,
GBQTP. CDx3 Notification Service
database,
PreferredStockInvesting.com)
About the New Issues
BBT-H, SCE-K, WRB-C and ENO
all offer double investment grade ratings
but, as is usually the case, are also among
the lowest dividend payers. KKR’s KKR-A
offers an investment grade rating from S&P
and a more generous 6.75 percent coupon, but
KKR is structured as an MLP, so shareholders
will receive a K1 at tax time rather than a
1099. Huntington’s HBANO splits the
difference with its Moody’s investment grade
rating and offers a 6.25 percent coupon.
As with almost all new
bank-issued preferreds since 2010, the
non-cumulative dividends from Huntington,
BOFI and BB&T are designated as Qualified
Dividend Income (QDI). Insurer AmTrust’s
AFSI-E and Gabelli’s GBQTP are also QDI-designated,
offering favorable tax treatment to many
buyers.
GBQTP and Southern California
Edison’s SCE-K are relatively rare cases
where cumulative dividends are also QDI-designated.
From page 5 of SCE-K’s prospectus:
“Distributions
constituting dividend income received by a
non-corporate U.S. holder in respect of the
Trust Preference Securities generally
represent “qualified dividend income” for
U.S. federal income tax purposes, which is
not taxed at ordinary income tax rates, but
instead is taxed at more favorable capital
gain rates for U.S. federal income tax
purposes.”
See “Hidden
Risks Of Tax-Advantaged Preferred Stocks”
for data regarding whether QDI preferreds
are really advantageous.
ENO from Entergy New Orleans is interesting
in that this security is an Exchange-Traded
Debt security (ETD) which is actually a
bond, recorded on the company’s books as
debt rather than equity. WRB-C and BOFIL are
also ETDs (green font seen in the above
table). But what makes ENO interesting is
that it is a “mortgage bond,” meaning that
the physical assets (mainly buildings and
other property) that Entergy has in New
Orleans serve as collateral against this
debt.
SHO-E from Sunstone Hotel
Investors is a 4.6 million share issue with
a 6.95 percent coupon, costing the company
$8 million per year in dividend expense
while raising about $111 million. These
proceeds were used to redeem the 4.0 million
outstanding shares of the company’s 8.0
percent SHO-D on April 6. Interestingly,
this move does not save the company any
money; the new issue’s 4.6 million shares at
6.95 percent produce the same dividend
expense obligation as the old 4.0 million
shares at 8.0 percent.
In Context: The U.S.
Preferred Stock Marketplace
So how do the eleven new
March issues stack up within the context of
today’s preferred stock marketplace?
Since the Fed announced a
rate increase last December, U.S. preferred
stock prices have been generally lower
(rates and prices of fixed-return securities
tend to move in opposite directions). But
that changed during March.
The data being charted here
is limited to call-protected issues in order
to limit the price distorting effect of an
anticipated redemption.
Going into December of last year, the
average market price of U.S.-traded,
call-protected preferred stocks and ETDs was
$24.86 per share and remained below that
level until March 18, closing at $24.91 that
day.
While the continuing strong
demand for U.S. preferred stocks can be
attributed to several factors, the next
chart makes it pretty clear that the lack of
attractive alternatives is certainly among
them. U.S.-traded preferred stocks are
currently returning an average current yield
of 7.2 percent (blue line) while the annual
return being offered to income investors by
the 10-year treasury is 1.8 percent and that
of the 2-year bank CD is a meager 1.5
percent.
It is into this marketplace
that March’s new issues were introduced.
For comparison, I have set the Yield column
in Figure 3 above to show the current yield
of the eleven new March preferreds on March
30.
While we are still in a
relatively high-priced preferred stock
market, the after-tax/after-inflation
returns being offered to income investors by
the alternatives are essentially
non-existent.
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