PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, February 2016
There were four new preferred
stocks issued during February 2016, bringing
the total number of these securities trading
on U.S. stock exchanges to 888.

As of February 29, EBAYL had
yet to start trading so it appears with zero
volume and last trade price in our database,
but is expected to begin trading within the
next few days.
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.
As with last month’s new preferred stock
IPO’s, banks were well represented in
February (see “New
Preferred Stock IPOs, January 2016”).
BANC-E is from Banc of California, GS-N is
from Goldman Sachs, FRC-G is from First
Republic Bank and EBAYL is from eBay.
Sources: Prospectuses
BANC-E,
FRC-G,
GS-N,
EBAYL . CDx3 Notification Service
database,
PreferredStockInvesting.com
About the New
Issues
While ratings are somewhat
controversial, the benefit to the issuer is
clear here; the two lowest coupon securities
are offered by the two companies with double
investment grade ratings (unrated securities
are coded as NF – Not Found).
As has been the case since 2010 when the
Wall Street Reform Act was signed into law,
new bank-issued preferred stocks offer
non-cumulative dividends. On the upside,
February’s three new bank issues are all
designated as offering Qualified Dividend
Income (QDI), providing a tax benefit to
many buyers (see “Hidden
Risks Of Tax-Advantaged Preferred Stocks”
for data regarding whether QDI preferreds
are really advantageous).
eBay’s EBAYL provides preferred stock
investors with a rare opportunity to invest
directly in a technology firm without
exposure to common stock risk. EBAYL was
purchased by its underwriters on February 22
and will begin retail trading shortly.
Introducing an ETD into its capital stack is
a new strategy for eBay, rarely seen among
retailers (online or otherwise). ETDs are
bonds and are recorded on the company’s
books as debt, rather than equity (as with
preferred stocks). As debt, ETDs are
generally seen as carrying less risk than
the same company’s preferred stock in the
event of a bankruptcy. As bonds, the
interest paid to shareholders by ETDs is
generally cumulative and is taxed as
ordinary income (no QDI opportunity here).
EBAYL is a large issue raising about $726
million after underwriter commissions. With
double investment grade ratings, and the
lower risk profile of an ETD, EBAYL should
attract a lot of attention for the next
several weeks. Retail buyers should
remember, however, that the lower the
coupon, the less likely a future redemption
(Public Storage, for example, has never
redeemed a preferred stock with a coupon
below 6.125 percent). Even though the call
date for EBAYL is March 1, 2021, it would
not be unusual for shares to remain trading
until their February 1, 2056 maturity date
so perpetual ownership is a consideration
here.
In Context: The
U.S. Preferred Stock Marketplace
So how do the four new
February issues stack up within the context
of today’s preferred stock marketplace?
Continuing last year’s trend,
the average market price of call-protected,
U.S.-traded preferred stocks has fallen this
year, favoring buyers.

The data being charted here
is limited to call-protected issues in order
to limit the price distorting effect of an
anticipated redemption.
After having started 2016 at $24.59, buyers
were paying an average of $24.29 per share
at the end of February, down $0.30 so far
this year.
Beyond ratings, many things
affect the market prices of these securities
such as the proximity to their call or
maturity date, proximity to their next
ex-dividend date, industry and/or overall
health of the issuer (think upstream oil
producers), perceived direction of interest
rates, pending government regulatory or
policy changes, cumulative versus
non-cumulative dividends and tax treatment
of dividend payments. So what we really need
to look at is current yield, which
calculates the average annual dividend yield
per dollar invested (without considering
re-invested dividend return or any future
capital gain or loss). Current yield is a
“bang-for-your-buck” measure of value that
normalizes differences in coupon rate and
price to give us a single, comparable
metric.
As prices have come down,
buyers do not need to invest as many dollars
to earn the same return, so preferred stock
yields are heading up. The current yield of
all call-protected, U.S.-traded preferred
stocks at the end of February was 8.043
percent (rated and unrated), up 0.328
percent from 7.715 percent at the beginning
of the year.

For comparison, I have set
the Yield column in the first table above to
show the current yield of the four new
February preferreds on February 29.
It is into this marketplace that February’s
new issues were introduced. Compared to the
overall market, the four new February issues
appear fairly miserly, offering lower
coupons. But when comparing these issues to
other recent introduction (see
January 2016 IPO’s) or other issues from
the same companies (where there are some),
the underwriters have concluded that today’s
buyers are willing to pay about $25 per
share for these income securities from these
issuers.
If the underwriters got it right, the market
prices of these new securities should stay
fairly close to $25 (their par value) for
the next few weeks. As unique as it is,
EBAYL will be the one to watch.
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