PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, August 2016
Preferred stock investors saw
a robust buffet of new issues during August
with the introduction of eleven new
securities to pick from. August’s eleven new
preferred stocks are offering an average
current yield of 6.24 percent for the
consideration of preferred stock investors.
Persistent low rates have motivated issuers
to bring 65 new preferred stocks to market
this year. There are now 902 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
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
while such securities are trading on the OTC
exchange (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).
Note that LNDMP from Landmark Infrastructure
Partners (LMRK) is listed here with its
temporary OTC trading symbol, but this
security was in the process of being
transferred to the NASDAQ Global Market
exchange under its permanent symbol LMRKO
just as this article was being submitted for
publication. Those considering shares should
use LMRKO as the trading symbol for this
security.
Diversification
August’s preferred stock
offerings are unique in several ways. First,
six of the eleven new issues are traditional
preferred stocks while the remaining five -
LMHB from Legg Mason (LM), MDLX from Medley
LLC (MDLY), EAI and ELC from Entergy (ETR)
and CTBB from CenturyLink/Qwest (CTL) - are
Exchange-Traded Debt Securities.
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).
The five August ETDs have been stealing much
of the trading spotlight, with CenturyLink’s
CTBB getting the lion’s share of the
attention every day. With a 6.5 percent
coupon, the proceeds from the CTBB
introduction have allowed the company to
redeem CTQ (7.375 percent), modestly
shrinking the enormous pile of debt that
cost the company its investment grade rating
from Moody’s last March (S&P still rates
CTBB as investment grade).
Similarly, the proceeds from Entergy’s EAI
and ELC (both offering 4.875 percent), which
are also ETDs, allowed the company to redeem
three higher coupon issues – EAA (5.750
percent, September 15), ELA (5.875 percent,
September 16) and ELB (6.0 percent,
September 16).
For the first time this year, August was a
month where no banks issued new preferred
stocks; the closest are Legg Mason’s and
Medley’s offerings (LMHB and MDLX,
respectively), both firms being brokerages.
Just as rare is that both of these new
issues are ETDs, rather than the
non-cumulative traditional preferreds that
are much more common from this sector.
August’s six traditional preferred stocks
are from a diversified field as well.
Landmark is a new company (2014) that leases
infrastructural property to wireless
communication and power companies. Landmark
is a partnership so owning shares of their
preferreds means you’ll be getting a K-1 at
tax-time.
Rexford Industrial Realty is a property
REIT, owning industrial real estate, and is
a newcomer to the preferred stock
marketplace with its unrated REXR-A issue at
5.875 percent. Sotherly Hotels (SOHO) is
also a property REIT, continuing a trend we
have seen this year with a continuous stream
of new cumulative, traditional preferreds
from hotel REITs.
(Sources: Prospectuses
LNDMP/LMRKO,
BCV-A,
LMHB,
MDLX,
SSW-H,
REXR-A,
EAI,
ELC,
LANDP,
CTBB,
SOHOB. 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
Bancroft Fund’s (BCV) BCV-A and Seaspan’s
(SSW) SSW-H (“QDI” in the Status column of
the above table) are a distribution of these
companies’ after-tax earnings and are
therefore designated as being Qualified
Dividend Income, although there are
exceptions and conditions (see prospectus).
In Context: The
U.S. Preferred Stock Marketplace
So how do the new August issues stack up
within the context of today’s preferred
stock marketplace?
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 $1.72 per
share this year (an annualized value gain of
10.5 percent), including a $0.04 increase
during August.
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 eleven new August
preferreds on August 31. It is into this
marketplace that August’s eleven new issues were
introduced.
Income versus Value
Investing, Year-To-Date
With an average current yield of 6.4 percent,
plus the 10.5 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 16.9
percent (6.4 percent of which is realized in
dividend cash).
Those investing in common stocks, as measured by
the S&P500, saw flat returns during August.
Starting at 2013 at the beginning of the year,
this common stock value index closed on August
31 at 2171, an unrealized annualized value gain
of about 11.8 percent plus about two percent in
average annualized dividend yield – a
year-to-date annualized gain of about 13.8 for
common stock investors.
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