PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, March 2018
The March 21 hike in the
federal funds rate had the predicted result
on preferred stock market prices, pushing
yields up and prices down just prior to, as
well as after, the announcement. After
February’s lull in new preferred stock
introductions, March was a more normal month
in that regard with eight new issues.
March’s new issues
March’s eight new preferred
stocks are offering an average annual dividend
(coupon) of 6.8 percent. Here are the eight new
issues introduced during March 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 exchanges, 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 120 high
quality preferred stocks selling for an average
price of $24.94 (March 30), offering an average
current yield of 5.53 percent. And 62 of these
high quality issues are selling below their $25
par value offering an average current yield of
5.4 percent. By high quality I mean preferreds
offering the characteristics that most
risk-averse preferred stock investors favor such
as investment grade ratings and cumulative
dividends.
There are now a total of 893 of
these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying new
shares for wholesale
Note that CNNLP from CAI
International (CAI) and ALLSP from Allstate
(ALL) are still trading on the wholesale
Over-The-Counter exchange (as of March 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. CCNLP will become CAI-A and
ALLSP will become ALL-G.
About
the new issues
The March issues have several
things in common, but each are also unique in
their own way.
CMSA from CMS Energy Corp. (CMS)
is an Exchange-Traded Debt Security, also
referred to as a baby bond. 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.
CMSA is one of two March issue to offer double
investment grade ratings. CMS is the largest
electric and natural gas utility in Michigan
through its principal subsidiary Consumers
Energy Company.
AIZP, issued by Assurant, Inc. (AIZ),
has a $100 par value and is part of the
insurer’s plan to raise the capital for its
pending acquisition of TWG Holdings, Inc. The
plan also includes the issue of Senior Notes due
2023, Senior Notes due 2028 and its
Fixed-to-Floating Subordinated Notes due 2048.
AIZP is a very complex and non-standard security
in many ways, so be sure to read the prospectus
carefully. The security includes both mandatory
and optional conversion provisions, and the
company may prematurely redeem your shares if
the pending acquisition of TWG Holdings is not
finalized by the end of 2018.
CODI-B from Compass Diversified
Holdings (CODI) is an unrated traditional
preferred stock using the fixed-to-floating
dividend rate structure. With this structure,
this security offers a fixed 7.875 percent
coupon until its April 30, 2028 call date. At
that time, the coupon varies based on the
three-month LIBOR rate (currently 2.02457
percent) plus 4.985 percent. CODI is a $1
billion (market cap) private equity company
established in 2005, investing in middle market
companies.
QTS-A is an unrated traditional
preferred stock issued by QTS Realty Trust
(QTS). QTS is a property REIT specializing in
data center properties. QTS-A, the company’s
first preferred stock issue, offers 7.125
percent cumulative dividends. Cumulative
dividends means that if the company skips a
dividend payment to you, their obligation to pay
you accumulates (they still owe you the money).
APO-B, issued by global
investment manager Apollo Global Management
(APO), is an investment grade (S&P BBB+)
tradition preferred stock offering a 6.375
percent coupon and non-cumulative dividend (if
the company misses a dividend payment, they are
not obligated to ever pay it). APO-B is Apollo’s
second preferred stock issued within the last
thirteen months, both of which are virtually
identical – same coupon, non-cumulative
dividends, and five years to call date with no
maturity date (perpetual).
TSCAP is an unrated,
non-cumulative traditional preferred stock
offered by TriState Capital Holdings (TSC). TSC
is a holding company for TriState Capital Bank,
a regional bank operating in the northeastern
United States, established in 2007. TSCAP has a
fixed-to-floating rate structure, initially
offering a 6.75 percent fixed annual dividend
until its April 1, 2023 call date. At that time,
the rate becomes pegged to the three-month LIBOR
rate plus 3.985 percent.
CNNLP/CAI-A, issued by CAI
International offers a fixed-to-floating rate
structure similar to TSCAP, with an 8.5 percent
coupon that is fixed until the security’s April
15, 2023 call date. At the time, the dividend
rate will vary based on the 3-month LIBOR rate
plus 5.82 percent. CNNLP/CAI-A is the company’s
first preferred stock, is unrated, but offers
cumulative dividends. CAI was founded in 1989
and operates as a transportation lending and
logistics company in San Francisco.
ALLSP/ALL-G is from Allstate
Corp., the insurer’s seventh preferred stock
issue in five years and the first since June
2014. ALLSP/ALL-G offers double investment grade
ratings. The 5.625 percent dividends are
non-cumulative and the shares become callable on
April 15, 2023.
Sources: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com. Prospectuses
CMSA,
AIZP,
CODI-B,
QTS-A,
APO-B,
TSCAP,
CNNLP/CAI-A,
ALLIS/ALL-G
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 February’s new issues
plays out.
Companies incorporated as REITs
(QTS-A) 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 (CMSA), 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 AIZP, TSCAP, CNNLP/CAI-A and ALLSP/ALL-G
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
As expected, to keep inflation in
check, the Federal Open Market Committee
increased the federal funds rate at their March
20-21 meeting. For preferred stock investors,
upward pressure on interest rates finally
reached a tipping point with the signing of the
Tax Relief and Jobs Act on December 20, 2017,
delivering a long-awaited income boost to
today’s preferred stock buyers.
Interest rates and the prices of
fixed-returned income securities move in
opposite directions – rates up, prices down.
Take a look at what U.S. preferred stock prices
have done since the middle of last year.

Preferred stock buyers are finally getting some
price relief. The lower prices that come with
increasing interest rates boost portfolio yields
for income investors.
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.
Moving down the risk scale, the
next chart shows the dramatic increase in
current yield realized by today’s preferred
stock buyers when compared to the yield earned
by those investing in the 10-year treasury note
or 2-year bank Certificates of Deposit.
U.S.-traded preferred stocks are currently
returning an average current yield of 6.7
percent (blue line) while the annual return
being offered to income investors by the 10-year
treasury is 2.7 percent and that of the 2-year
bank CD is a meager 2.4 percent.

For comparison, I have set the
Yield column in the first table above to show
the current yield of the new March preferreds on
March 30. It is into this marketplace that
March’s new issues were introduced.
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