PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, November 2017
Preferred stock issuers continued
to introduce new issues at a blistering pace
throughout November with fourteen new
securities. November’s fourteen new preferred
stocks are offering an average dividend (coupon)
of 6.8 percent.
November’s new issues
Here are the fourteen new issues
introduced during November for the consideration
of preferred stock investors.
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.
A special note regarding
preferred stock trading symbols: Annoyingly,
unlike common stock trading symbols, the format
used by brokers and other online quoting
services for preferred stock symbols is not
standardized. For example, the Series A
preferred stock from Public Storage is “PSA-A”
at TDAmeritrade, Google Finance and several
others but this same security is “PSA.PR.A” at
E*Trade. For a cross-reference table of how
preferred stock symbols are denoted by sixteen
popular brokers and other online quoting
services, see “Preferred
Stock Trading Symbol Cross-Reference Table.”
There are currently 96 high
quality preferred stocks selling for an average
price of $25.80 (November 30), offering an
average coupon of 5.54 percent and a current
yield of 5.36 percent. And 14 of these high
quality issues are selling below their $25 par
value, providing an average yield-to-call of
5.69 percent. By high quality I mean preferreds
offering the characteristics that most
risk-averse preferred stock investors favor such
as investment grade ratings, cumulative
dividends and call-protection.
There are now a total of 906 of
these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying
new shares for wholesale
Note that the two newest issues –
EPRRP from EPR Properties (EPR) and NSSTP from
Nustar Energy LP (NS) – are still trading on the
wholesale Over-The-Counter exchange (as of
November 30). These are temporary OTC trading
symbols until these securities move to the NYSE
exchange, at which time they will receive their
permanent symbols.
But there is no need to wait;
during a period of relatively 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).
Those who have been following
this strategy of using the wholesale OTC
exchange to buy newly introduced shares for less
than $25 are more able to avoid a capital loss
as prices start to drop (if they choose to
sell).
Your broker will automatically
update the trading symbols of any shares you
purchase on the OTC. EPRRP will become EPR-G and
NSSTP will become NS-C.
About
the new issues
The diversity of the fourteen new
November issues is robust. Securities from four
property REITs, one mortgage REIT, a shipping
company, one pharmaceutical company, a business
development company, three banks, two utilities
and one company from the petroleum industry were
introduced during the month.
Property Real Estate
Investment Trusts (pREITs)
INN-E, REXR-B, AHT-I, EPRRP/EPR-G
REITs come in two flavors –
property REITs and mortgage REITs. While
property REITs make money by owning physical
property and leasing it out, mortgage REITs make
money by investing in residential and/or
commercial mortgages (the idea being to borrow
cash at a low rate and use that cash to buy
mortgages that pay a higher rate).
Diversity can also be found
within this group – Summit Hotels and Ashford
Hospitality, hotels; Rexford Industrial,
industrial facilities; EPR Properties, retail.
INN-E from Summit Hotel
Properties (INN), REXR-B from Rexford Industrial
Realty (REXR), AHT-I from Ashford Hospitality
(AHT) and EPRRP/EPR-G from EPR Properties are
all cumulative, perpetual preferred stocks
offered by property REITs.
“Cumulative” means that if the
issuer misses a dividend payment to you, they
still owe you the money (short of a bankruptcy);
their obligation to you accumulates. “Perpetual”
means that the issuer is not required to ever
redeem your shares (i.e. the shares have no
maturity date).
All of these property REIT issues
are traditional preferred stocks offering
fixed-rate dividends.
Mortgage Real Estate
Investment Trusts (mREITs)
Mortgage REITs typically do not
own physical property; rather, they raise
capital (such as through a preferred stock
offering) that is used to buy bundles of
residential and/or commercial mortgages. If the
cost of the raised capital is less than the
bundled mortgage rate, mortgage REITs make money
on the spread. The cost of investment capital
that mortgage REITs are able to raise is
determined by the prevailing interest rates at
the time while the revenue coming from the
mortgages, at least to some degree, remains
fixed until the mortgages mature. So during a
period of increasing interest rates, cost is
rising while revenue remains relatively flat,
squeezing the profitability of mortgage REITs.
Two Harbors Investment
Corporation (TWO) is a mortgage REIT, investing
in a variety of residential and commercial
mortgages. TWO-C pays a fixed 7.25 percent
dividend until its January 27, 2025 call date.
At that time, the dividend rate of this security
becomes variable based on the three-month LIBOR
rate (currently at 1.38 percent) plus 5.011
percent.
Shipping
SBLKZ is an Exchange-Traded Debt
Security from Greece-based shipper Star Bulk
Carriers (SBLK). ETDS’ are bonds recorded on the
company’s books as debt (rather than as equity,
as in the case of preferred stock). As debt, the
obligation to pay the interest on these bonds is
cumulative. As bonds, ETDS’ are often seen as
having lower risk than the same company’s
preferred stock shares. ETDS are very similar to
preferred stocks and are often listed on
brokerage statements as such.
The new SBLKZ offers an 8.3
percent coupon, the proceeds from which are
being used to redeem all outstanding shares of
the company’s 8.0 percent SBLKL on December 11.
Both of these securities are ETDS’. While using
the new 8.3 percent SBLKZ to redeem the old 8.0
percent SBLKL increases the company’s annual
interest expense, this maneuver extends the
maturity of this debt by three years.
Pharmaceutical
Fortress Biotech (FBIO) is new to
the preferred stock marketplace, offering its
FBIOP on November 6. Founded in 2006, the
company was formerly operating as Coronado
Biosciences. Fortress acquires and/or develops
companies that produce what it feels are
promising pharmaceutical and biotechnology
products. FBIOP, with a $25 par value, was
introduced with a fixed, cumulative 9.375
percent coupon in early-November. But the
security’s underwriters appear to have missed
the mark here as investors are currently pricing
FBIOP at $22.30 (November 30), a mere three
weeks after introduction.
Business Development
Corporations
MVCD from MVC Capital, Inc. (MVC)
is an Exchange-Traded Debt Security offering a
fixed 6.25 percent coupon. The proceeds from
MVCD are being used by the company to redeem all
outstanding shares of its 7.25 percent MVCB on
December 21, 2017.
Typically, these types of income securities will
offer a five-year call period and a maturity
date that is several decades into the future.
But the new MVCD becomes callable in just two
years (November 30, 2019) and matures in just
five years (November 30, 2022).
Banks
MBFIO, LTSL, JMPD
MBFIO is offered by MB Financial
(MBFI), a financial services firm offering
banking services to businesses in or near
Chicago and Philadelphia. MBFIO is a
non-cumulative, traditional preferred stock and
offers a speculative-grade Ba3 rating from
Moody’s Financial Services.
LTSL, an Exchange-Traded Debt
Security from Ladenburg Thalmann Financial
Services (LTS), is the company’s second income
security and offers a coupon of 6.5 percent.
Thalmann is an investment banking company
founded in 1876 and is headquartered in Miami.
JMPD from JMP Group, Inc. (JMP)
is also an Exchange-Traded Debt Security,
offering a 7.25 percent coupon. The $50 million
proceeds from this new issue will be just enough
for JMP to redeem their nearly identical 7.25
percent JMPC on December 28, 2017. While this
maneuver is cash even to the company (no
interest expense savings since the coupons are
the same), the end result extends the maturity
on this debt from JMPC’s January 15, 2021 to
JMPD’s November 15, 2027.
Utilities
DTW, SOJC
DTW from DTE Energy (DTE) and
SOJC from Southern Company (SO) are nearly
identical – both are Exchange-Traded Debt
Securities, both offer the same 5.25 percent
coupon, both have the same call date and
maturity date (December 1, 2022 and December 1,
2077, respectively) and both have the same $25
par value. Further, both of these securities
offer double investment grade ratings from
Moody’s and S&P.
Petroleum
NuStar Energy is a petroleum
pipeline, storage and fuel marketing limited
partnership founded in 1999. Those purchasing
shares of the company’s new NSSTP/NS-C preferred
stock should expect to receive a K-1, rather
than a 1099, at tax-time. The NSSTP/NS-C is
NuStar’s second new income security introduction
this year with the nearly identical NS-B being
offered last April at 7.625 percent. The new
NSSTP/NS-C offers buyers a 9.0 percent coupon
until the security’s December 15, 2022 call
date. At that time, the dividend rate offered by
this security becomes a floating rate pegged to
the 3-month LIBOR rate, plus 6.88 percent.
Buyers should be cautious of this structure
since, while sounding especially attractive
during a period of increasing rates, issuers
will frequently call the shares on the call date
if not doing so means increasing their dividend
expense to shareholders (see “Variable-Rate
Preferred Stocks Underperform Their Fixed-Rate
Cousins”).
Sources: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses
INN-E,
SBLKZ,
FBIOP,
REXR-B,
AHT-I,
MVCD,
MBFIO,
DTW,
LTSL,
TWO-C,
SOJC,
JMPD,
EPRRP/EPR-G,
NSSTP/NS-C
Tax
treatment
The tax treatment of the income
you receive from income securities can be a bit
confusing, but it really boils down to one
question – Has the company already paid tax on
the cash that is being used to pay you or not?
If not, the IRS is going to collect the full tax
from you; if so, you still have to pay tax, but
at the special 15 percent rate.
With that rule in mind, here is
how the tax treatment of November’s fourteen new
issues plays out.
Companies incorporated as REITs,
be they property REITS (Summit, Rexford,
Ashford, EPR) or mortgage REITS (Two Harbors),
are required to distribute at least 90 percent
of their pre-tax profits to shareholders. Doing
so in the form of non-voting preferred stock
dividends is the most common method of complying
and because these dividend payments are made
from pre-tax dollars, dividends received from
REITs are taxed as regular income (i.e. they do
not qualify for the special 15 percent dividend
tax rate).
Interest that a company pays to
those loaning the company money is a business
expense to the company (tax deductible), so the
company does not pay tax on the interest
payments it makes to its lenders (i.e. interest
payments made to lenders are paid with pre-tax
dollars). Since Exchange-Traded Debt Securities
are debt (Star, MVC, DTE, Ladenburg, Southern
Company, JMP Group), ETDS shareholders are on
the hook for the taxes. Income received from
ETDS’ is taxed as regular income.
Lastly, if a company pays your
preferred stock dividends out of its after-tax
profits, the dividend income you receive is
taxed at the special 15 percent tax rate. Such
dividends are referred to as “Qualified Dividend
Income” or QDI. QDI preferred stocks are often
seen as favorable for holding in a
non-retirement account due to the favorable 15
percent tax treatment. Looking at the Status
column in the above table, dividends received
from Fortress Biotech’s FBIOP and MB Financial’s
MBFIO are a distribution of the company’s
after-tax earnings and are therefore designated
as being Qualified Dividend Income (see
prospectus for exceptions and conditions).
In
Context: The U.S. preferred stock marketplace
So how do the new November issues
stack up within the context of today’s preferred
stock marketplace?
For many months now, two of the
most significant contributors to upward price
pressure have been (1) continued
zero-to-negative rates implemented by foreign
central banks and (2) insensitivity by member
banks toward changes in the federal funds rate.
Through July of this year, preferred stock
buyers totally ignored the Fed’s federal funds
rate increases.
But that started to change during
early-August. And prices have remained
relatively flat since then as investors appear
to be anticipating another federal funds rate
hike when their next meeting adjourns on
December 13.
With the surge of new issues that we have seen
over the last six months, it also appears that
issuers are anticipating upward pressure on
rates (which pushes prices down) as well.
But 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, 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 2.4 percent and that of the 2-year
bank CD is a meager 1.9 percent.
For comparison, I have set the
Yield column in the first table above to show
the current yield of the new November preferreds
on November 30. It is into this marketplace that
November’s new issues were introduced.
Income
versus Value Investing, Year-To-Date
With an average current yield of
6.4 percent, plus the 5.0 percent annualized
value gain, those investing in U.S.-traded
preferred stocks since the beginning of 2017 are
currently on pace for a total annualized return
of 11.4 percent (6.4 percent of which is
realized in dividend cash).
Starting at 2252 at the beginning
of the year (January 3, 2017 open), the S&P500
common stock value index closed on November 30
at 2648, an unrealized annualized value gain of
about 19.2 percent plus about two percent in
average annualized dividend yield – a
year-to-date annualized gain of about 21.2
percent for common stock investors. The
sustainability of this performance has become
the focus of many common stock investors.
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