PREFERRED
STOCK NEWS
New
Preferred Stock IPO’s, September 2018
The U.S. preferred stock
marketplace experienced a monumental change
during September and preferred stock issuers
seem to have seen it coming.
Increasing rates deliver increased income to
preferred stock buyers as the dividends paid by
new issues go up. But increasing dividend rates
means an increase in dividend expense to the
issuing company. While we usually see five or
six new preferred stock issues each month, we
saw sixteen during September, just ahead of the
Fed’s September 26 interest rate increase.
Preferred stock prices fell an average of $0.41
per share during September, delivering higher
returns to today’s preferred stock buyers. The
average share price of U.S.-traded preferred
stocks is now $25.03, just above these
securities’ $25 par value, delivering an average
current yield of 6.7 percent.
September’s new issues
September’s sixteen new preferred
stocks are offering an average annual dividend
(coupon) of 6.4 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 124 high
quality preferred stocks selling for an average
price of $24.53 (September 28), offering an
average current yield of 5.64 percent. And 80 of
these high quality issues are selling below
their $25 par value offering an average current
yield of 5.51 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 907 of
these securities trading on U.S. stock exchanges
(including convertible preferred stocks).
Buying
new shares for wholesale
Note that JPMLL from JP Morgan (JPM),
ABCCL from Associated Banc Corp (ASB) and CNPLL
from CenterPoint Energy (CPN) are still trading
on the wholesale Over-The-Counter exchange (as
of September 30). 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).
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. JPMLL will probably become
JPM-I, ABCCL will become ASB-E and CNPLL will
become CNP-B.
About
the new issues
NCZ-A from AllianzGI Convertible
& Income Fund II (NCZ) is an unrated traditional
preferred stock offering 5.5 percent cumulative
dividends. NCZ is a closed-end fund investing at
least fifty percent of its portfolio in
convertible securities. The fund seeks to use
capital secured at a relative low rate to invest
in equity securities offering a higher rate. The
$105 million in proceeds raised by NCZ-A “…will
be used to refinance outstanding indebtedness or
other forms of leverage.” The fund commenced
operations in 2003 and is headquartered in New
York City.
BHFAL from Brighthouse Financial
(BHF) is rated as investment grade by S&P and
offers a 6.25 percent cumulative dividend. This
security is an Exchange-Traded Debt Security
(green font in the above table). 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.
Brighthouse is a $5.3 billion life insurance
company founded in 2016 and headquartered in
Charlotte, North Carolina.
MRCCL from Monroe Capital (MRCC)
is an unrated ETDS offering a 5.75 percent
coupon and trades on the NASDAQ Global Select
exchange. Monroe is a relatively small business
development company with a market cap of $280
million. Headquartered in Chicago, the company
invests primarily in middle-market companies
throughout North America. The $60 million in
proceeds from MRCCL will be used primarily to
pay down debt, which this company has plenty of.
With annual revenue (2017) of $51 million, MRCC
is carrying $114.4 million in debt under their
ING credit facility. MRCCL is the company’s
first and only income security.
RILYI from from B. Riley
Financial (RILY) is an unrated Exchange-Traded
Debt Security offering a 6.875 percent coupon.
RILYI is the company’s fifth ETDS offered within
the last two years. B. Riley always strikes me
as a company that has a hard time saying no.
While the prospectus for RILYI does not
specifically say so, the proceeds from this
security may help with B. Riley’s recent
acquisition of magicJack VocalTec, a company
that manufactures a voice over IP telephone
device. The company is in a multitude of
businesses from financial services, retail store
liquidation, internet domain and email hosting
and, now, magicJack. Founded in1973, B.Riley is
headquartered in Woodland Hills, California.
QVCD is offered by QVC,
Incorporated. But QVC Inc. is not a publicly
traded company. Rather, all of its common stock
is owned by Liberty QVC Holding, LLC which, in
turn, is a subsidiary of Qurate Retail Group,
Inc. (QRTEA). QVC, Inc. is the outfit that sells
everything from jewelry to fishing poles on
cable TV, hosted by the overly friendly. As a
TV-based retailer, the company’s customer base
is undergoing radical change in that (1) online
retail has essentially taken over and (2)
younger generations do not shop on TV like
previous generations. Nevertheless, the company
is able to secure an investment grade S&P rating
for this ETDS, offering an attractive 6.375
percent coupon. The proceeds raised by QVCD are
being used to pay down debt.
DUKB from Duke Energy (DUK) is
another ETDS issued during September and offers
double investment grade ratings (which explains
its rather miserly 5.625 percent coupon). The
proceeds generated by DUKB are being used to pay
down debt. Duke is a $56 billion regulated
utility providing electric and gas service
throughout the southern United States.
SSW-I is a traditional preferred
stock from Hong Kong-based shipper Seaspan
Corporation (SSW). Seaspan now has five
preferred stocks and two ETDS’ trading on U.S.
stock exchanges. Only one of these older
securities is currently redeemable (SSW-D, 7.95
percent) so those holding shares do not need to
be concerned about the proceeds from SSW-I being
used to redeem your shares. SSW-I offers eight
percent cumulative dividends until the
security’s October 30, 2023 call date, at which
time the rate will float based on the
three-month LIBOR (currently at 2.31563 percent)
plus 5.008 percent. None of Seaspan’s income
securities are rated.
Shortly after the housing
collapse that began in 2008, a group of senior
executives spun away from Public Storage and
formed American Homes 4 Rent (AMH) and, using
the same capital raising strategy that they had
become accustom to, issued three new preferred
stocks – AMH-A, AMH-B and AMN-C. With the
proceeds, AMH bought tens of thousands of
distressed homes throughout the U.S. at bargain
basement prices and turned them into rental
properties. With the new AMH-H, the company now
has five income securities trading, all of which
offer cumulative dividends.
IFFT from International Flavors &
Fragrances (IFF) is the most unique preferred
stock offered during September. IFF is a biotech
company that produces exactly what their name
says – flavors and fragrances. If you need
street gravel to taste like a T-bone or need to
smell like fresh ocean spray for that special
someone, IFF has just the product for you. If
you ever get a chance to read up on how IFF
creates potions that, when sniffed or tasted,
fool just the right nerves in the human brain,
you will find it absolutely fascinating. IFFT
has a somewhat unusual $50 par value and a call
date of June 18, 2019, less than one year after
its introduction (I believe this is the first
time I have seen such a short call period) so no
such thing as a long-term capital gain
opportunity here. As a mandatory convertible
preferred stock, IFFT is as complex as it is
unique so be sure to read the prospectus
carefully. For example, from page 1 of the
prospectus “Each Unit is comprised of (i) a
prepaid stock purchase contract issued by us and
(ii) a senior amortizing note due September 15,
2021 issued by us. Each amortizing note will
have an initial principal amount of $8.45436 and
a final installment payment date of September
15, 2021.” IFF is a $12.7 billion company
founded in 1833.
CIM-C from Chimera Investment
Corp (CIM) is an unrated traditional preferred
stock offering a 7.750 percent cumulative
dividend until its September 30, 2025 call date.
At that time, the rate will float based on the
three-month LIBOR (currently at 2.31563 percent)
plus 4.743 percent. CIM is a $3.5 billion
mortgage REIT, meaning that rather than owning
physical properties as a property REIT would,
Chimera seeks to generate earnings from the
spread between yields on its investments and its
cost of borrowing. Its investments are bundles
of mortgages (residential and commercial), many
of which can be long-term in nature.
Consequently, during periods of increasing
interest rates, the shorter-term cost of
borrowing tends to increase while revenues tend
to be locked in at lower rates for longer
periods of time. This math often squeezes the
earnings of mortgage REITs, requiring nimble
management of their investment portfolio (often
moving toward bundles of variable rate and/or
shorter-term mortgages).
NCV-A raises $100 million for the
AllianzGI Convertible & Income Fund (NCV),
following closely on the heels of NCZ-A
introduced by AllianzGI Convertible & Income
Fund II earlier in the month (the Roman numeral
“II” being just about the only difference
between the two). NCV-A pays a slightly more
generous coupon at 5.625 percent compared to its
more miserly NCZ-A cousin at 5.5 percent.
Comparing the two prospectuses, the fund
description, use of proceeds and investment
objectives and policies of these two funds is
identical (see my notes regarding NCZ-A above).
JPMLL from JP Morgan Chase (JPM)
is currently trading on the Over-The-Counter
exchange so this is a temporary trading symbol.
The permanent NYSE symbol has yet to be
assigned, but will probably be JPM-I although JP
Morgan has issued so many preferred stocks for
so many years, all conceivable symbols,
including JPM-I, have been previously used.
Consequently, be very careful when reviewing
information related to this Series DD security.
After being absent from the preferred stock
market since 2015, JP Morgan issued JPMLL on
September 17, generating about $1.5 billion in
net proceeds. JPM now has seven preferred stocks
trading. As with all bank-issued preferred
stocks since the Dodd-Frank legislation was
passed in July 2010, JPMLL dividends are
non-cumulative. JPM is a $396 billion
“Too-Big-To-Fail” bank founded in 1799.
CNFRL is an unrated ETDS from
Conifer Holdings (CNFR) offering a 6.75 percent
coupon. Note that as I am writing this on
Friday, September 28 CNFRL has yet to start
trading ($0.00 last price and volume in the
above table), but should start shortly on the
NASDAQ Global Market exchange. Conifer is a new
comer to the income security market with CNFRL
being its first issue. Founded in 2009, Conifer
is a small $48 million property and casualty
insurance company headquartered in Birmingham,
Michigan.
ABCCL/ASB-E from Associated
Bancorp (ASB) offers a Moody’s investment grade
rating and 5.975 percent non-cumulative
dividends. The company has two other nearly
identical preferreds trading, none of which are
redeemable until at least June of 2020. ASB is
using the $100 million proceeds from this
security to repurchase common stock. ASB is a
regional bank offering banking services through
270 banking locations throughout Wisconsin,
Illinois and Minnesota. Profitability, cash
flow, cash on hand, current ratio and other
financial metrics are impressive here. The $4.6
billion company was founded in 1861 and is
headquartered in Green Bay.
HCXY from Hercules Capital, Inc.
(HTGC) is an unrated ETDS offering a 6.25
percent fixed coupon. HCXY is the company’s
second ETDS issue within the last six months,
with HCXZ being issued last April at 5.25
percent (illustrating the upward pressure on
interest rates). Hercules also has a third ETDS
currently trading. Originally issued in July
2014, HTGX became callable last April. Hercules
is a $1.2 billion venture capital firm located
in Palo Alto, California. While the firm was
originally focused on technology start-ups, it
has since branched into so many areas that the
company’s organization chart on page S-2 of
HCXY’s prospectus looks more like a nuclear
power plant wiring diagram. Some of the $40
million proceeds from the new HCXY may go toward
partially redeeming HTGX shares but the
prospectus is not specific on this point.
CNPLL/CNP-B from CenterPoint
Energy Inc. (CNP) is one of the most complex
securities, and took one of the most tortured
paths to market, that I have ever seen. CNP
introduced this mandatory convertible preferred
stock simultaneously with a common stock
offering in order to fund the pending merger of
CenterPoint Energy, Vectren Corporation and
Pacer Merger Sub, Inc. (and Pacer is currently a
subsidiary of CenterPoint Energy just to make it
easier for everyone). The underwriters for this
deal originally purchased the preferred stock
shares from CNP in August (so that was the
published IPO date at that time) with a
preliminary SEC filing stating that
CNPLL/CNP-B “…is a new issue of securities with
no established trading market. We do not intend
to list the Series A Preferred Stock on any
national securities exchange or to arrange for
quotation on any automated dealer quotation
systems.” So that was the end of that until
Wednesday, September 27 when the OTC exchange
assigned a temporary trading symbol (CNPLL), the
IPO date was updated to September 24 (no
indication as to why) and these preferred stock
shares began trading, despite the August
declaration that they would not. Further, the
updated 424B5 SEC filing (one of several)
provides a multi-page table for figuring out how
one is to convert CNPLL/CNP-B shares into CNP
common stock shares down the road. After half an
hour, I stopped trying to figure it out. My
guess is that these shares were originally
intended for private placement as part of the
merger deal but were subsequently designated for
public trading as an afterthought.
Sources: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com. Prospectuses:
NCZ-A,
BHFAL,
MRCCL,
RILYI,
QVCD,
DUKB,
AMH-H,
SSW-I,
IFFT,
CIM-C,
NCV-A,
JPMLL,
CNFRL,
ABCCL/ASB-E,
HCXY,
CNPLL/CNP-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.
Traditional preferred stock
dividends are typically paid out of pre-tax
profits so are taxable as regular income; you
pay the full tax since the company has not
(IFFT). The same is true for dividends received
from partnerships since each partner is
responsible for their own tax obligations.
Companies incorporated as REITs
(AMH-H, CIM-C) 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 (BHFAL, MRCCL, RILYI, QVCD, DUKB,
CNFRL, HCXY), 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, six of September’s
new issues pay QDI dividends (NCZ-A, SSW-I,
NCV-A, JPMLL, ABCCL/ASB-E, CNPLL/CNP-B).
In
Context: The U.S. preferred stock marketplace
Preferred stock prices have been
artificially elevated for several years, but
that ended in September. September was a pivotal
month for preferred stock investors as the
upward pressure on rates finally produced a
meaningful price correction for U.S. preferred
stocks. The average market price for U.S.-traded
preferred stocks is now at $25.03, just above
these securities’ $25 par value. With their
September 26 declaration that their monetary
policy is “no longer accommodative,” the Fed is
finally leaving our market to its participants
(buyers and sellers).
The following chart illustrates
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.
The 10-year treasury finally
broke through the three percent barrier for only
the second time in the last twelve months.
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 3.1 percent and that of the 2-year
bank CD has recovered nicely to 2.8 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 30. It is into this
marketplace that September’s new issues were
introduced.
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