PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, September 2017
What does it mean when four
times the normal number of companies
simultaneously, but independently, decided
to raise capital by issuing a new preferred
stock? Coincidence? Probably not.
Preferred stock issuers have come to the
conclusion that the low-rate gravy train is
finally coming to an end (whether they are
correct or not is yet to be seen). We started to
see the first hint of this last June when the
number of new issues ticked up to eight that
month. That was followed by seven new issues
during July but then a whopping fourteen during
August.
Offering an average dividend (coupon) of 6.15
percent, twenty new preferred stocks were issued
during September, the most robust crop that we
have seen since March 2013 (twenty-two were
issued that month).
September’s new issues
Here are the twenty new issues
introduced during September 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.
While HTFA was introduced during September, it
has yet to begin retail trading as of September
29.
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 $25.91 (September 29), offering an
average coupon of 5.54 percent and a current
yield of 5.34 percent. And ten of these high
quality issues are selling below their $25 par
value, providing an average yield-to-call of
5.19 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 958 of
these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying
new shares for wholesale
Note that four of the newest
issues – GBBLP from Gabelli Multimedia Trust
(GGT), IRRTP from Investors Real Estate Trust
(IRET), FDDRP from Federal Realty Investment
Trust (FRT) and SPRYP from Spirit Realty Capital
(SRC) - are still trading on the wholesale
Over-The-Counter exchange (as of September 29).
These are temporary OTC trading symbols until
these securities move to the NYSE, 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).
A special note regarding GBBLP:
This symbol, assigned by the good folks who run
the OTC exchange, is the same as the temporary
OTC symbol that was assigned to another security
in May of 2016 (Gabelli Global Small and Mid Cap
Value Trust). When researching this security, be
sure that you are looking at data for the
current issue (Gabelli Multimedia Trust).
Your broker will automatically
update the trading symbols of any shares you
purchase on the OTC. GBBLP will become GGT-E,
IRRTP will become IRET-C, FDDRP will become
FRT-C and SPRYP will become SRC-A.
About
the new issues
The diversity of the twenty new
September issues is striking. Securities from
eleven property REITs, four business development
corporations, two management investment
companies, an electric utility and a retail bank
were all introduced during the month.
Property Real Estate
Investment Trusts (pREITs)
RLJ-A, PEI-D, GNL-A, PSB-X,
GMRE-A, DLR-C, UBP-H, CLNS-J, IRRTP/IRET-C,
FDDRP/FRT-C, SPRYP/SRC-A
RLJ-A from RLJ Lodging (RLJ),
PEI-D from Pennsylvania Real Estate Trust (PEI),
GNL-A from Global Net Lease (GNL), PSB-X from PS
Business Parks (PSB), GMRE-A from Global Medical
REIT (GMRE), DLR-C from Digital Realty (DLR),
UBP-H from Urstadt Biddle (UBA), CLNS-J from
Colony NorthStar (CLNS), IRRTP/IRET-C from
Investors Real Estate, FDDRP/FRT-C from Federal
Realty and SPRYP/SRC-A from Spirit Realty 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).
Diversity can also be found
within this group – RLJ Lodging, hotels;
Pennsylvania Real Estate, Urstadt Biddle and
Federal Realty, retail; Global Net Lease, PS
Business Parks, Colony NorthStar and Spirit
Realty, commercial centers; Global Medical,
healthcare facilities; Digital Realty, data
centers; Investors Real Estate, apartments.
With the exception of RLJ-A from
RLJ Lodging, all of these property REIT issues
are traditional preferred stocks offering
fixed-rate dividends. RLJ-A shares are
optionally convertible to the company’s common
stock at the option of the shareholder in
accordance with the conversion terms specified
in this security’s prospectus (link provided
below).
Business Development
Corporations
TCGP, GECCL, GLADN, HTFA
While these four securities were
all issued by companies structured as Business
Development Corporations, they are different in
several ways.
TCGP from Carlyle Group LP (CG)
is one of two non-cumulative income securities
offered during September and is also the only
such security from a Limited Partnership.
GECCL from Great Elm Capital (GECC)
and HTFA from Horizon Technology Financial
Corporation (HRZN) are Exchange-Traded Debt
Securities. ETDS’s 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’s 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.
GLADN from Gladstone Capital
(GLAD) is the only “term” preferred stock among
September’s twenty offerings. A term preferred
stock (as opposed to a perpetual preferred
stock, discussed earlier) trades for a specific
term until its maturity date. While most term
preferred stocks also have a call date, at which
time the issuer may redeem your shares (buy back
from you for $25 per share) but is not required
to, the shares must be redeemed on their
maturity date. In the case of GLADN, Gladstone
may redeem your shares on or after GLADN’s
September 30, 2019 call date at their option,
but the company must redeem your shares on
September 30, 2024 if not previously called.
Management Investment
Companies
ECF-A, GBBLP/GGT-E
ECF-A and GBBLP/GGT-E are both
offered by the Gabelli empire. ECF-A is from
Ellsworth Growth and Income Fund (ECF), which is
managed by Gabelli Funds, LLC while GBBLP/GGT-E
is from Gabelli Multimedia Trust (GGT).
Ellsworth invests in the common equity of target
companies. Gabelli Multimedia is eighty percent
invested in telecommunications, media and
entertainment companies.
Electric Utility
ALP-Q, GPJA
Both of these September issues are from
subsidiaries of Southern Company (SO). ALP-Q is
from Alabama Power while GPJA is from Georgia
Power. While ALP-Q is a traditional, cumulative
preferred stock, GPJA is an Exchange-Traded Debt
Security (discussed earlier). Both have the same
October 1, 2022 call date but as an ETDS, GPJA
matures on October 1, 2077 (great news for
today’s kindergartners investing in preferred
stocks).
Retail Banking
TCF-D
Rounding out the September
offerings is TCF-D from TCF Financial
Corporation (TCF), a retail bank established in
1923. TCF-D is a 5.7 percent non-cumulative,
traditional preferred stock, the proceeds from
which the bank is using to redeem all six
million shares of its older 7.5 percent TCF-B.
This maneuver saves the bank about $2.7 million
per year in dividend expense.
(Sources: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses -
RLJ-A,
ALP-Q,
TCGP,
TCF-D,
PEI-D,
GNL-A,
PSB-X,
GMRE-A,
DLR-C,
ECF-A,
UBP-H,
CLNS-J,
GECCL,
GPJA,
GLADN,
GBBLP/GGT-E,
IRRTP/IRET-C,
FDDRP/FRT-C,
HTFA,
SPRYP/SRC-A).
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 September’s twenty new
issues plays out.
Companies incorporated as REITs,
be they property REITS (RLJ Lodging,
Pennsylvania Real Estate, Global Net Lease, PS
Business Parks, Global Medical, Digital Realty,
Urstadt Briddle, Colony NorthStar, Investors
Real Estate, Federal Realty, Spirit Realty) or
mortgage REITS, 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 (Great Elm, Georgia Power, Horizon
Technology), ETDS shareholders are on the hook
for the taxes. Income received from ETDS’s 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 Alabama Power’s ALP-Q, TCF Financial’s
TCF-D, Ellsworth’s ECF-A and GBBLP/GGT-E from
Gabelli Multimedia, 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 September
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 have totally ignored the Fed’s federal
funds rate increases.
But that started to change during
early-August, as preferred stock prices realized
their second most significant drop so far this
year and increases have been more modest since
then.
When combined with the surge of new issues that
we have seen over the last four months, there
may be reason to be optimistic that upward
pressure on rates has finally built up enough to
start pushing prices down in a meaningful way.
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 2.3 percent and that of the 2-year
bank CD is a meager 1.8 percent.
For comparison, I have set the
Yield column in the first table above to show
the current yield of the new September
preferreds on September 29. It is into this
marketplace that September’s new issues were
introduced.
Income versus Value
Investing, Year-To-Date
With an average current yield of
6.4 percent, plus the 7.1 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 13.5 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 September 30
at 2519, an unrealized annualized value gain of
about 15.8 percent plus about two percent in
average annualized dividend yield – a
year-to-date annualized gain of about 17.8
percent for common stock investors.
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