PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, January 2018
Preferred stock investors
finally realized long-awaited price relief
during January, with the average market
price of U.S. preferred stocks dropping
$0.72 to $25.13 per share. Income investors
are now being treated to higher paying
preferred stocks for lower prices.
After ignoring the Fed’s repeated federal funds
rate increases, it was December’s tax reform act
that did the trick. The Act provides a number of
tax benefits to individuals and businesses so
for at least the 2018 tax year businesses will
realize substantial cash savings making common
stocks attractive.
Income investors make their money from the
dividends generated by income securities
(preferred stocks, bonds) while value investors
make their money from an increase in the stock
price of the company they have invested in
(common stocks).
Income investors are generally buy-and-hold
investors (they rarely sell their shares) and
therefore see a period of falling prices as an
opportunity to buy more dividend-paying shares
at a bargain price. As we saw during January, a
period of falling prices boosts the return
earned by income investors on their purchases.
Conversely, value investors see a period of
falling prices as a time to sell their shares,
hopefully in time to avoid a loss – exactly the
opposite of the strategy used by income
investors when prices are falling.
January’s new issues
January’s nine new preferred
stocks are offering an average dividend (coupon)
of 7.2 percent. Here are the nine new issues
introduced during January 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 84 high
quality preferred stocks selling for an average
price of $24.80 (January 31), offering an
average coupon of 5.54 percent and a current
yield of 5.57 percent. And 48 of these high
quality issues are selling below their $25 par
value. 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 899 of
these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying
new shares for wholesale
Note that the newest issue –
CTMMF from Costamare Inc. (CMRE) – is still
trading on the wholesale Over-The-Counter
exchange (as of January 31). This is a temporary
OTC trading symbol until this security moves to
the NYSE exchange, at which time it will receive
its permanent symbol.
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. CTMMF will become CMRE-E.
About
the new issues
There is quite a bit of diversity
with January’s nine new offerings.
Three of January’s new preferreds
were issued by property REITs, one from a
mortgage REIT, three from shipping companies,
one utility and one Business Development
Corporation. All nine new issues are unrated but
offer cumulative dividends. “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.
Property
Real Estate Investment Trusts (pREITs)
BFS-D, UMH-D, JCAP-B
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).
BFS-D from Saul Centers (BFS),
UMH-D from UMH Properties (UMH) and JCAP-B from
Jernigan Capital (JCAP) are all perpetual
preferred stocks offering fixed-rate dividends.
“Perpetual” means that the issuer is not
required to ever redeem your shares (i.e. the
shares have no maturity date).
Saul Centers is using the
proceeds from their new BFS-D (6.125 percent) to
redeem 3 million of the outstanding 5 million
shares of their older BFS-C (6.875 percent) on
February 12. This maneuver saves the company
about $560,000 per year in dividend expense.
UMH Properties is rather unique
within the property REIT space, specializing in
manufactured home communities. UMH-D is the
company’s third preferred stock issue in as many
years, none of which are as yet redeemable. UMH
is a relatively small company (about $500
million market cap) and was founded in 1968.
Jernigan Capital is an odd duck.
The company is incorporated as a REIT, but is
not a mortgage REIT, so I have listed them here
under property REITs. But that doesn’t quite fit
either. Jernigan provides debt and equity
financing to self-storage companies. Perhaps one
of our readers can shed some historical light on
how Jernigan Capital has ended up being
incorporated as a REIT rather than as a BDC or
something similar. JCAP-B, issued at 7.0 percent
on January 19, is the company’s only preferred
stock issue.
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.
NLY-G from Annaly Capital
Management (NLY) is a tradition preferred stock
paying cumulative dividends. This security
offers a “fixed-to-float” dividend rate
structure, paying a fixed 6.5 percent dividend
until its March 31, 2023 call date. At that
time, the dividend rate of this security becomes
variable based on the three-month LIBOR rate
(currently at 1.7734 percent) plus 4.172
percent.
Shipping
GLOP-B, TOO-E, CTMMF/CMRE-E
GLOP-B, issued by GasLog Partners
LP (GLOP) also offers the fixed-to-float rate
structure and pays a fixed 8.2 percent dividend
until its March 15, 2023 call date. The rate
becomes variable at that time, calculated by
adding 5.839 percent to the then-current
three-month LIBOR rate. GasLog, founded in 2014
and headquartered in Monaco, charters its fleet
of nine LNG tankers. GLOP-B is the company’s
second income security issued within the last
seven months. With total 2016 gross revenue
reported at $229 million, the $100 million
raised by GLOP-B represents about half of this
company’s annual sales volume. Note that GasLog
is structured as a foreign limited partnership.
Those considering buying GLOP-B shares should
consult a tax specialist regarding the taxation
and reporting requirements of income from such
securities.
TOO-E from Teekay Offshore
Partners (TOO) is the company’s third preferred
stock currently trading and its first issue
since April 2015. Founded in 2006 and
headquartered in Bermuda, Teekay provides a
variety of shipping and related services to the
offshore oil industry. Interestingly, while
interest rates have been going down for several
years, the dividend rate that Teekay has had to
offer on its three preferred stock issues since
TOO-A was introduced in 2013 have gone up (7.25
percent for Series A in April 2013, 8.50 percent
for its Series B in April 2015 and 8.875 percent
from its Series C offered on January 16).
TOO-E’s 8.875 percent dividend is fixed until
its February 15, 2025 call date, then the rate
will float based on the 3-month LIBOR plus 6.407
percent.
CTMMF/CMRE-E is from Costamare
Inc. (CMRE), a container shipping company with
69 ships. Costamare was founded in 1974 and is
headquartered in Monaco. CTMMF/CMRE-E offers a
fixed dividend rate of 8.875 percent. Costamare
now has four preferred stocks trading, with the
oldest (CMRE-B) becoming redeemable in August of
this year.
Utilities
SRE-A from Sempra Energy (SRE) is
January’s only convertible preferred stock.
There are two types of convertible preferred
stock – mandatory convertibles, where the shares
will be converted to some number of shares of
the issuer’s common stock on a specific date and
optionally convertibles, where shareholders have
the option to convert their shares to the
issuer’s common stock (or not). The various
conversion ratios, limitations, timing and
conditions are spelled out in the security’s
prospectus. SRE-A is a mandatory convertible
preferred stock, the proceeds from which are
being used toward SRE’s acquisition of
Texas-based Energy Future Holdings Corporation.
Southern California Gas is a subsidiary of
Pacific Enterprises which, in turn, is a
subsidiary of Sempra Energy. Sempra has three
preferred stocks trading, the other two being
issued by Southern California Gas many years
ago. SRE-A has a somewhat unusual par value of
$100 per share.
Business
Development Corporation
GECCM is an Exchange-Traded Debt
Security from Great Elm Capital (GECC). 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. GECCM is Great Elm’s second income
security, both of which have been issued within
the last four months.
Sources: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com. Prospectuses
SRE-A,
NLY-G,
GLOP-B,
GECCM,
BFS-D,
TOO-E,
UMH-D,
JCAP-B,
CTMMF/CMRE-E
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 January’s nine new
issues plays out.
Companies incorporated as REITs (Annaly,
Saul Centers, UMH, Jernigan) 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 (GECCM), 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 SRE-A, GLOP-B, TOO-E and CTMMF/CMRE-E 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
January 2018 was a pivotal month
for preferred stock investors as prices finally
started to fall, boosting the yields provided to
today’s buyers. Remember that interest rates and
the market prices of income securities typically
move in opposite directions – rates up, prices
down. The following chart illustrates how
preferred stock investors all but ignored the
Fed’s repeated interest rate hikes throughout
2017.
But take a look at what happens
after the Tax Relief and Jobs Act was signed
into law on December 20, 2017.
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 2.2 percent.
Because today’s preferred stock
buyers are able to snap up dividend-paying
shares for a lower price, the return on their
investment goes up.
For comparison, I have set the
Yield column in the first table above to show
the current yield of the new January preferreds
on January 31. It is into this marketplace that
January’s nine new issues were introduced.
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