PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, June 2018
The upward pressure on
interest rates that has been building for
some time now continues to deliver benefits
to preferred stock investors in the form of
higher dividends and lower market prices. As
the first half of 2018 wraps up, higher
rates have provided an average price savings
of about $0.50 per share to preferred stock
buyers.
June’s new issues
June’s seven new preferred stocks
are offering an average annual dividend (coupon)
of 6.9 percent 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 121 high
quality preferred stocks selling for an average
price of $25.09 (June 29), offering an average
current yield of 5.51 percent. And 51 of these
high quality issues are selling below their $25
par value offering an average current yield of
5.37 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 899 of
these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying
new shares for wholesale
Note that ENSTF from Enstar Group
Limited (ESGR), TSSKF from Tsakos Energy
Navigation Limited (TNP) and QTTTP from QTS
Realty Trust (QTS) are still trading on the
wholesale Over-The-Counter exchange (as of June
29). These are temporary OTC trading symbols
until these securities move to a big board
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
if prices drop (if they choose to sell).
Your broker will automatically
update the trading symbols of any shares you
purchase on the OTC. ENSTF will become ESGRP,
TSSKF will become TNP-F and QTTTP will become
QTS-B.
About
the new issues
COWNL from Cowen, Inc. (COWN) is
an Exchange-Traded Debt Securities, also known
as a baby bond. Oddly, the NGS exchange assigned
the same trading symbol to this new issue as
that of Cowen’s most recently redeemed security
so be careful here. 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 company has
three ETDS’ currently trading with COWNL being
the second new income security issued within the
last six months. How rising interest rates have
benefitted income investors over the last six
months can be seen by the dividend rate paid by
Cowen’s two most recent offerings – COWNZ from
December 2017 offers 7.350 percent while last
month’s COWNL pays 7.750 percent. Cowen is an
asset management company, managing the
investments of its clients throughout various
subsidiaries since 1994.
FRC-I is offered by First
Republic Bank (FRC) and is one of two June
securities that come with double investment
grade ratings (Baa3/BBB-). FRC-I is a
traditional preferred stock paying 5.5 percent
non-cumulative dividends. When judged on the
risk-versus-reward scale, this security’s 5.5
percent coupon is fairly miserly when compared
to several other recent offerings such as UNUMA
(an ETDS that I mentioned last month, offering
6.25 percent and a Moody’s investment grade Baa3
rating), MetLife’s MET-E offered at 5.625
percent last month with Baa2/BBB ratings (also
discussed in last month’s article) and RNREF
discussed next. The bulk of the proceeds from
FRC-I will likely be used to redeem eight
million shares of FRC-E, originally issued in
2013 at 7.0 percent, generating a $3 million
annual dividends savings to the bank.
RNR-F from RenaissanceRe Holdings
(RNR) is the company’s third currently-trading
preferred stock, offering 5.750 percent
non-cumulative dividends and double investment
grade ratings (Baa2/BBB). This security’s 5.750
percent is closer to market than FRC-I’s 5.5
percent coupon, but still lagging which probably
explains why it has been trading below its $25
par almost every day since its introduction.
Even with its strong ratings, the underwriters
probably should have put RNR-F’s coupon at 6.0
percent. RNR is a $5 billion (market cap)
insurance and reinsurance company headquartered
in Bermuda and established in 1993.
SNV-D from Synovus Financial
Corporation (SNV) is a Ba3/BB- rated traditional
preferred stock offering non-cumulative
dividends with a fixed-to-floating rate
structure. With this structure, this security
offers a fixed 6.300 percent coupon until its
June 21, 2023 call date. At that time, the
coupon varies based on the three-month LIBOR
rate (currently 2.31781 percent) plus 3.352
percent. Synovus is using the proceeds from this
issue to redeem all 5.2 million shares of its
SNV-C preferred stock, generating a $1.787
million annual dividend savings. Synovus is a
$6.5 billion regional bank, originally founded
in 1888, still serving the southeastern United
States.
ENSTF/ESGRP comes from Enstar
Group Limited (ESGR), a direct competitor of
RenasissanceRe although with nothing close to
RNR’s ratings. Structurally, this security is
similar to SNV-D from Synovus, offering a fixed
7.000 percent coupon paying non-cumulative
dividends until its September 20, 2028 call
date. At that time, the coupon varies based on
the three-month LIBOR rate plus 4.015 percent.
Enstar has a $4.5 billion market cap, operates
internationally and is headquartered in Bermuda.
The proceeds from this security are being used
to pay down the company’s revolving credit and
term loan obligations, converting debt into
equity on its balance sheet.
TSSKF/TNP-F is a traditional
preferred stock offered by Greek shipper Tsakos
Energy Navigation Limited (TNP). This unrated
security defines the high risk/high reward end
of the scale for June’s offerings. Its
cumulative dividend obligation is about the only
thing that risk-averse income investors might
find attractive. Cumulative dividends means that
if the company misses a dividend payment to you,
they still owe you the money (their obligation
to pay you accumulates). TSSKF/TNP-F has a
fixed-to-float rate structure, offering a fixed
9.5 percent until July 30, 2028 at which time
the rate becomes variable, pegged to the
three-month LIBOR plus 6.54 percent.
QTTTP/QTS-B from QTS Realty Trust
(QTS) is a somewhat rare type of preferred stock
in that it is an “optionally convertible”
security, allowing the preferred stock shares to
be converted to the issuer’s common stock shares
as specified in the security’s prospectus.
Convertible preferred stocks come in two flavors
– mandatory convertible and optionally
convertible. While mandatory convertible
preferred stocks convert to the company’s common
shares by the company on the security’s call
date, optionally convertible preferred stock
shares are convertible at the option of the
shareholder. QTTTP/QTS-B is somewhat unique in
that it is optionally convertible at the option
of the shareholder until the security’s July 20,
2023 call date; on that date, the company gains
the right to convert the shares. Oddly, while
the prospectus allows QTS to convert the shares
on or after July 20, 2023, it prohibits the
company from ever redeeming the shares for cash.
Prior to this security, the most recent
optionally convertible preferred stock issued in
the U.S. occurred in September 2016. This
security also has a $100 par value. QTS is a
$2.2 billion Real Estate Investment Trust and
specializes in data centers.
Sources: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com. Prospectuses
COWNL,
FRC-I,
RNR-F,
SNV-D,
ENSTF/ESGRP,
TSSKF/TNP-F,
QTTTP/QTS-B
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.
Companies incorporated as REITs (QTTTP/QTS-B)
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 (June’s COWNL), 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, five of June’s new
issues pay QDI dividends (FRC-I, RNR-F, SNV-D,
ENSTF/ESGRP, TSSKF/TNP-F).
In
Context: The U.S. preferred stock marketplace
U.S. preferred stock prices had
been edging back up throughout the second
quarter, until the Federal Open Market Committee
raised the federal funds rate on June 13. Doing
so put upward pressure on the dividends paid by
newly introduced income securities (preferred
stocks, bonds), treating today’s preferred stock
buyers to a long overdue income boost.
Further, the rate bump put
downward pressure on the prices of previously
issued lower-payers, creating additional buying
opportunities for income investors.
The following chart illustrates the effect of
the Fed’s rate increases on the average market
price of U.S.-traded preferred stocks over the
last twelve months.
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 compares the average 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. Note how the lower
prices seen since January in the above chart
have pushed up the current yield being earned by
today’s preferred stock investors.
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 2.8 percent and that of the 2-year
bank CD has recovered nicely to 2.7 percent.
For comparison, I have set the
Yield column in the first table above to show
the current yield of the new June preferreds on
June 29. It is into this marketplace that June’s
new issues were introduced.
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