PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, April 2016
April was a typical month for
new preferred stocks, with six new issues
being introduced for the consideration of
preferred stock investors. There are now 894
of these securities trading on U.S. stock
exchanges.
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.
The six new April issues are from a diverse
group of industries including banks: STT-G
from State Street (STT), BAC-A from Bank of
America (BAC) and CUBBP from Customers
Bancorp (CUBI), all three of which are
designated as offering Qualified Dividend
Income; a property REIT: UMH-B from UMH
Properties (UMH); and two business
development companies - TAXIL from Medallion
Financial (TAXI) and NEWTL from Newtek
(NEWT).
Note that Customers Bancorp’s CUBBP,
introduced on April 21, is still listed on
the Over-The-Counter exchange but on Friday,
April 29 when this data was gathered, the
volume was zero shares. CUBBP is a temporary
OTC trading symbol until this security moves
to the NYSE as CUBI-E, which appears to be
imminent (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
STT-G,
UMH-B,
TAXIL,
NEWTL,
BAC-A ,
CUBBP . CDx3 Notification Service
database,
PreferredStockInvesting.com)
About the New Issues
STT-G and CUBBP are offering
fixed-to-floating dividends, meaning that
they pay dividends at the indicated coupon
rate until their respective call dates then,
at that time, the dividend rate becomes
variable, resetting each quarter based on a
formula. In the case of STT-G, the current
5.350 percent coupon rate will be reset to
the three-month LIBOR rate at the time plus
3.709 percent. CUBBP is more generous,
adding 5.14 percent to the three-month
LIBOR. But be careful to notice that CUBBP’s
call date, when the new presumably glorious
rate kicks in, is ten years from now
compared to five years away for STT-G.
Having said that, preferred stock investors
should be aware that variable rate preferred
stocks have rarely, if ever, benefited
shareholders. While the notion that your
dividend rate will go up with interest rates
sounds great, the fact that the presumably
upward adjustment in the rate is tied to the
call date is no accident. Historically, if
the dividend rate is going to adjust upward,
the issuing company will usually redeem the
shares in order to avoid the increase in
dividend expense. Consequently, those
purchasing fixed-rate preferred stock shares
have earned about 180 percent more than
those purchasing variable-rate preferreds
during the same period (for historical data
see “Variable-Rate
Preferred Stocks Underperform Their
Fixed-Rate Cousins”).
Medallion Financial is an interesting
company facing an interesting challenge.
Wading into the baby bond market,
Medallion’s TAXIL is the company’s first
Exchange-Traded Debt Security. Medallion’s
primary business is the provision of
financing to taxi companies. The
“self-serve” or “gig” economy that
smartphones have made possible, connecting
consumers directly with suppliers, is just
getting started (crowd-funding is another
popular example, cutting out commercial
lenders). Uber, Lyft and their competitors
have beaten traditional taxi companies at
their own game only because taxi companies
became complacent; there was nothing
stopping taxi companies from doing what Uber
ultimately did. They are now paying the
price for over-embracing the status quo. The
extent to which this will impact Medallion
will depend on how traditional taxi
companies react over the long-term. But the
implication is that they would be best
served to figure out a way to participate,
rather than resist, this new model (and a
few already have).
Newtek’s NEWTL is also an ETDS, the second
such offering by Newtek. What I notice most
about NEWTL is its very short call and
maturity dates. Issued on April 13, 2016,
NEWTL has a call date of April 22, 2017
meaning that all buyers outside of the
security’s underwriters are exposed to
short-term capital gain treatment if the
company redeems these shares next April.
Also, while most ETDS are issued with a
maturity date several decades into the
future, NEWTL shares mature five years after
issue on March 31, 2021. The shares are not
rated (NR) by either Moody’s or S&P, so
today’s buyers are left entirely to their
own due diligence here.
In Context: The U.S.
Preferred Stock Marketplace
So how do the six new April
issues stack up within the context of today’s
preferred stock marketplace?
U.S.-traded preferred stocks remain in very high
demand. Coupled with the limited success of the
Fed’s efforts to increase the cost of money, the
average market price of U.S.-traded preferred
stocks has increased by $0.81 per share this
year (an annualized value gain of 9.9 percent).
The data being charted here
is limited to call-protected issues in order
to limit the price-distorting effect of an
anticipated redemption.
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.
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 6.9
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 April’s six new issues were introduced.
For comparison, I have set the Yield column
in the first table above to show the current
yield of the six new April preferreds on
April 29. With an average current yield of
6.9 percent, plus the 9.9 percent annualized
YTD value gain, those investing in
U.S.-traded preferred stocks since the
beginning of 2016 are currently on pace for
a total annualized return of almost 17
percent (6.9 percent of which has been
realized in dividend cash).
Those investing in common stocks, as
measured by the S&P500, have also done well
this year, seeing an unrealized annualized
value appreciation of about 12.7 percent
plus about two percent in average annualized
dividend yield.
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