PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, September 2016
Nine new preferred stocks
were introduced for the consideration of
preferred stock investors during September.
As the month came to an end, September’s
nine new preferred stocks were offering an
average current yield of 5.9 percent.
Persistent low rates have motivated issuers to
bring 74 new preferred stocks to market this
year. There are now 892 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 using
a temporary trading symbol on the wholesale
Over-The-Counter exchange (who, in turn,
sell them to us at retail within a few days
of the IPO date).
Buying New Shares
for Wholesale
Note that the most recently
introduced issue – CYORP from City Office
REIT (CIO) - is still trading on the
Over-The-Counter exchange (as of September
30). This is a temporary OTC trading symbol
until this security moves to the NYSE, at
which time it will receive its permanent
symbol. But there is no need to wait; during
a period of high prices, individual
investors, armed with a web browser and an
online trading account, can often purchase
newly introduced preferred stock shares at
wholesale prices just like the big guys (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).
Your broker will automatically update the
trading symbols of any shares you purchase
on the OTC. CYORP will become CIO-A. ARHPF,
also still trading on the OTC exchange, will
become ACGLP.
Diversification
Eight of the nine new issues are
traditional preferred stocks while the remaining
security – SOJB from energy provider Southern
Company (SO) – is an Exchange-Traded Debt
Security.
ETDs are bonds and are recorded on the company’s
books as debt rather than as equity, as in the
case of preferred stocks. As debt, ETDs pay
interest and, unless specified otherwise in the
prospectus (which I have only seen once several
years ago), are cumulative (meaning that in the
event of a skipped dividend payment, the company
still owes you the money; their obligation
accumulates).
September’s eight traditional preferred stocks
are from a diversified field, with insurance,
property REITs, banks and a business development
company all entering the U.S. preferred stock
market. Three of the new issues – ARHPF, AFSI-F
and AHL-D - come from property and casualty
insurers Arch Capital (ACGL), AmTrust Financial
(AFSI) and Aspen Insurance Holdings (AHL),
respectively.
City Office REIT is a property REIT specializing
in commercial office buildings. CIO’s September
issue (trading on the OTC exchange as CYORP as
described earlier) is the company’s first foray
into the preferred stock marketplace since its
founding in 2013.
Monmouth (MNR) is also a property REIT, owning
and leasing industrial space. September’s MNR-C,
issued at 6.125 percent, allowed the company to
redeem the outstanding shares of MNR-A for
October 14. Even though the A shares were
costing Monmouth 7.625 percent, there were only
1.15 million A shares issued back in 2006
compared to 5.4 million shares of the new C
series. Don’t be surprised if the company’s B
shares, with a coupon of 7.875 percent, are
redeemed next June when they reach their call
date.
Customers Bancorp (CUBI) and Associated
Banc-Corp (ASB) are both regional banks. CUBI’s
CUBI-F is the company’s third preferred stock
issue this year while ASB-D is the second new
issue for Associated Banc-Corp since June of
2015.
Rounding out September’s new
issues is GAINM from business development
company Gladstone Investment Corporation (GAIN),
offering an unrated, but cumulative, 6.25
percent coupon.
(Sources: Prospectuses
MNR-C,
ASB-D,
CUBI-F,
SOJB,
AHL-D,
GAINM,
AFSI-F,
ARHPF,
CYORP. CDx3 Notification Service database,
PreferredStockInvesting.com)
Tax Treatment
Dividends paid by REIT preferred
stocks are a pre-tax distribution of the
company’s earnings to shareholders. As a pre-tax
distribution, it is the shareholder who pays the
full tax so dividends received from REITS do not
qualified for any type of favorable tax
treatment (although portions of REIT dividends
are frequently re-classified at tax-time as
capital gains, hence lowering your tax burden in
that manner).
On the other hand, dividends received from
Associated Banc-Corp’s ASB-D, Customers
Bancorp’s CUBI-F, Aspen Insurance’s AHL-D,
AmTrust’s AFSI-F and Arch Capital’s ARHPF are a
distribution of these companies’ after-tax
earnings and are therefore designated as being
Qualified Dividend Income (“QDI” in the Status
column of the above table), although there are
exceptions and conditions (see prospectus).
In Context: The
U.S. Preferred Stock Marketplace
So how do the new September issues stack up
within the context of today’s preferred
stock marketplace?
During early September we saw the largest
dip in preferred stock market prices since
last February, as market participants
anticipated a rate increase from the Fed’s
September meeting. Once again, however, the
Fed kicked the can, and prices moved upward,
recovering much of the dip.
The average market price of U.S.-traded
preferred stocks has increased by $1.47 per
share this year, providing an annualized
value gain of 8.0 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 6.4
percent (blue line) while the annual return
being offered to income investors by the 10-year
treasury is 1.6 percent and that of the 2-year
bank CD is a meager 1.4 percent (currently,
tying up your money for an extra eight years in
a 10-year treasury only gets you 0.2 percent
over a federally-insured bank CD).
For comparison, I have set the
Yield column in the first table above to show
the current yield of the nine new September
preferreds on September 30. It is into this
marketplace that September’s nine new issues
were introduced.
Income versus Value
Investing, Year-To-Date
With an average current yield of 6.4 percent,
plus the 8.0 percent annualized 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 14.4
percent (6.4 percent of which is realized in
dividend cash).
For the second consecutive month, those
investing in common stocks, as measured by the
S&P500, saw flat returns during September.
Starting at 2013 at the beginning of the year,
this common stock value index closed on
September 30 at 2168, an unrealized annualized
value gain of about 10.3 percent plus about two
percent in average annualized dividend yield – a
year-to-date annualized gain of about 12.3 for
common stock investors.
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