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PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, March 2019
March delivered a spectacular crop of new preferred stock
issues, almost all of which are offering cumulative dividends and half
come
with investment grade ratings. Last December no new preferreds were
issued; for
January I described only four new preferreds while February’s
preferred stock market delivered a slightly better six new issues.
During
March, fourteen new preferred stocks were issued (and began trading by
press
time).
As the month came to a close, the average market price for all U.S.
traded preferred stocks was $24.93, up $0.21 per share over the last
month.
The
good news is that $24.93 is still below these securities’ $25.00 par
value. Remember
that the par value is what shareholders will receive in cash should the
issuing
company decide to redeem your shares so buying shares below par sets
you up for
a downstream capital gain on top of the regular dividend income
provided by
these securities.
March’s new issues
March’s
fourteen new preferred stocks are offering an average annual dividend
(coupon)
of 6.9 percent, an average current yield (which does not consider
reinvested
dividends or capital gain/loss) of 6.9 percent and an average
Yield-To-Call
(which does consider reinvested dividends and capital gain/loss) of 6.8
percent
(using March 29 prices).
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 and “PSA.PA” at Seeking Alpha. 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 123 high quality preferred stocks selling for an average
price of
$24.38 (March 29), offering an average current yield of 5.5 percent.
And 39 of
these high-quality issues are selling below their $25 par value,
offering an
average current yield of 5.5 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
is now a total of 905 of these securities trading on U.S. stock
exchanges
(including convertible preferred stocks).
Buying new shares for
wholesale
Note
that OCCIP from OFS Credit Company (OCCI), MRBPP from Merchants Bancorp
(MBIN),
AFINP from American Finance Trust (AFIN), DUEKL from Duke Energy (DUK)
and
NGLPP from NGL Energy Partners LP (NGL) are still trading on the
wholesale
Over-The-Counter exchange. OTC trading symbols are typically temporary
until
these securities move to their retail exchange, at which time they will
receive
their permanent symbols.
But
there is no need to wait. 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. OCCIP will keep this symbol as it moves to the NCM, MRBPP
will
become MBINP, AFINP will keep this symbol, DUEKL’s new NYSE symbol has
yet to
be specified and NGLPP will become NGL-C.
About the new issues
DLR-K
is a traditional preferred stock offered by Digital Realty (DLR) with
an investment grade rating from Moody’s Investors Service. DLR has six
preferred stocks trading on U.S. stock exchanges, although it is using
the $200
million proceeds from DLR-K (5.850 percent) plus cash on hand to redeem
all
outstanding shares of DLR-H (7.375 percent) on April 1, saving the
company
about $3 million per year in dividend expense. DLR is incorporated as a
property REIT specializing in data centers with properties throughout
North
America, Europe, Asia and Australia. With cloud and mobile computing
demand
pushing expansion, the company has announced a joint venture with
Mitsubishi,
purchasing a five-acre parcel in Tokyo upon which it will build a new
data
center hub. DLR-K pays cumulative dividends.
AI-C
is an unrated traditional preferred stock from Arlington Investment
Corporation
(AI). This security offers cumulative dividends using the
fixed-to-float rate
structure, paying 8.25 percent until its March 30, 2024 call date. The
rate
becomes variable at that time, using the three-month LIBOR rate
(currently at
2.59 percent) plus 5.664 percent. Page S-17 of the prospectus explains
how the
floating rate will be calculated should the 3-month LIBOR become
unavailable. AI
is a $300 million mortgage REIT, meaning that rather than owning
physical
properties as a property REIT would, the company seeks to generate
earnings
from the spread between yields on its investments and its cost of
borrowing.
Its investments are bundles of mortgages (primarily residential), 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). Looking at the
March price
chart for AI-C, it looks like its underwriters completely blew the 8.25
percent
coupon as this security has traded well below its $25 par value since
its March
5 introduction
NEE-N
is offered by NextEra Capital Holdings (NEE), the latest of the
company’s five
income securities that are currently trading on U.S. stock exchanges.
NEE-N is
a double-investment grade Exchange-Traded Debt Security offering a
5.650
percent coupon (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
may be listed on brokerage statements as such. NEE generates and
distributes
24,500 megawatts of electricity throughout North America. The $582
million proceeds
from NEE-N are expected to be used to reduce debt, including the
outstanding
obligation from its purchase of Gulf Power on January 1, 2019 (due June
25,
2019). The company was founded in 1925 and is headquartered in Juno,
Florida.
Global
insurer American International Group (AIG) re-entered the preferred
stock
market during March with the introduction of AIG-A, a
double-investment grade traditional preferred stock. AIG-A offers a
cumulative
5.85 percent annual dividend. “Cumulative” dividends are those that can
be
deferred but not suspended. Put another way, if the company misses a
dividend
payment they still owe you the money (their obligation to you
accumulates). AIG
is a $38 billion insurer founded in 1919 and headquartered in New York
City.
BC-C
is a 6.375 percent ETDS from Brunswick Corporation (BC) offering
double-investment grade ratings. The next time you’re hauling in a bass
from a
Boston Whaler or jumping a double wake behind a Bayliner with a big
Mercury
outboard, thank Brunswick. Or while you are telling exaggerated stories
of your
greatness over a game of pool, don’t forget to notice that the table is
almost
certainly made by this company. BC is the Procter and Gamble of
recreational
products; there’s very little outdoor or indoor fun you can have
without coming
into contact with something they make. Brunswick has three income
securities
trading, all of which were introduced within the last six months.
Established
in 1824, this $5.1 billion company is headquartered in Mettawa,
Illinois.
AFGB
is from property and casualty insurer American Financial Group (AFG).
As
an ETDS offering double-investment grade ratings and cumulative
interest, this
security is very similar to Brunswick’s BC-C. The most obvious
difference is in
AFGB’s miserly 5.875 percent interest rate, compared to BC-C’s 6.375
percent.
AFGB is the third income security that AFG has introduced within the
last five
years. AFG is a $8.7 billion company founded in 1872 and headquartered
in
Cincinnati.
TRTN-A
is offered by Triton International Ltd. (TRTN), the world’s largest
lessor of shipping containers and chassis. Coming off of a multi-year
container
glut, Triton posted a 25 percent profit margin on December 30, 2018 and
managed
to beat analysts EPS estimates every quarter last year. While the
company’s
operating performance is enviable, its whopping $7.5 billion long-term
debt
probably explains in large measure the meager B+ rating from S&P.
During
March the company executed a common share buyback, whereby all 7.1
million
shares held by Warburg Pincus LLC were sold to underwriter Morgan
Stanley, with
Triton then buying 1.5 million of these shares from MS. TRTN’s common
stock has
lost about 10 percent of its value since March 1. This indirect buyback
burned
about $45 million of the $75 million generated by the TRTN-A preferred
stock
introduction. TRTN-A is the company’s first and only income security.
TRTN is a
$2.4 billion company founded in 1980 with headquarters in Bermuda.
BPYPP
is from Brookfield Property Partners LP (BPY) offering 6.5 percent
cumulative dividends and a BB+ speculative grade rating from S&P.
This
issuer is a partnership so holders of their preferred stock units will
receive
at least one K-1 at tax time (rather than form 1099). In February 2019,
BPY
announced its intent to buy back up to $405 million of its LP units
(analogous
to common stock) from unitholders. This offer expired on March 25,
2019. While
the BPYPP prospectus does not specify how the company will use the
proceeds
from this preferred stock introduction, the $184 million coming from
this new
income security would presumably go toward the unit buyback, should the
offer
be taken up by unitholders. BPY is a $17 billion commercial real estate
company
headquartered in Bermuda.
BHFAP
is an investment grade traditional preferred stock from life insurance
company
Brighthouse Financial (BHF). BHFAP pays a non-cumulative 6.6 percent
dividend. 2018
was BHF’s first full year operating as an independent company after its
separation
from MetLife. Brighthouse became an independent company in 2017. By any
measure, operating as an independent company has been good for
Brighthouse.
Throughout 2018 the company grew top line revenue from $1.8B in Q1 to
$3.9B in
Q4. Net income grew from a $67 million loss in Q1 to a $1.4 billion
gain in Q4.
And all while expanding cash on hand from $1.9 billion to $4.1 billion
by year
end. And this is after the company embarked on an aggressive common
stock buy
back throughout 2018, purchasing $105 million in shares last year and
another
$19 million during January 2019. BHF has no debt maturing prior to
2024. Oddly,
in the face of this strong performance, the common has lost about 30
percent of
its value over the last year. BHFAP is the company’s second income
security
introduced within the last six months.
OCCIP
is an unrated “term” preferred stock issued by OFS Credit Company, Inc.
paying a 6.875 percent dividend. Most preferred stocks are “perpetual”
preferreds, meaning that they will continue to trade until the issuer
redeems them,
if ever (they trade perpetually). A “term” preferred stock, on the
other hand,
is one that the issuer is required to call on a specific future date
(i.e. the
shares will only trade for a specific term). Only about 25 percent of
U.S.-traded preferred stocks are term preferreds. OCCIP has an optional
call
date of March 31, 2021, meaning that the company regains the right to
redeem
the shares for par on that date, but is not required to do so. The term
date is
March 21, 2024; the shares will be called on that date. This security
is
currently trading on the Over-The-Counter exchange as OCCIP but the
Term Sheet
indicates that the company has applied for the shares to trade on the
NASDAQ
Capital Markets exchange using the same symbol. OCCIP is also a monthly
dividend payer. No specification is made regarding whether the
dividends are
cumulative or non-cumulative, so assume non-cumulative. From their
website:
“OFS Credit Company, Inc. is a newly-organized, non-diversified,
closed-end
management investment company. The Company’s investment objective is to
generate current income, with a secondary objective to generate capital
appreciation primarily through investment in collateralized loan
obligation
equity and subordinated debt securities.”
MRBPP/MBINP
from Merchants Bancorp is an unrated traditional preferred stock paying
non-cumulative 7.0 percent dividends using the fixed-to-float rate
structure. The
rate becomes variable on the security’s April 1, 2024 call date, using
the
three-month LIBOR plus 4.605 percent. Page S-14 of the prospectus
explains how
the floating rate will be calculated should the 3-month LIBOR become
unavailable. Merchants is a $543 million regional bank headquartered in
Indiana
with 14 offices. MRBPP/MBINP is the company’s only income security,
raising $50
million in gross proceeds. No specific use for the proceeds of this new
security were provided by the company (“general corporate purposes”).
Importantly, but perhaps coincidentally, MBIN has lost about a third of
its
value since last summer despite impressive financial performance and
plenty of
cash on hand. The bank was established in 1990.
AFINP
from American Financial Trust is an unrated traditional preferred stock
paying cumulative 7.5 percent dividends. AFINP is the company’s only
income security.
AFIN is a $1.1 billion REIT focused on retail property acquisition and
management. The company has an aggressive growth strategy, closing 130
property
acquisition during 2018 with an average remaining lease period of over
15
years. The company also sold 19 properties in the fourth quarter of
2018, 14 of
which were dogs (unleased). $15.5 million of the $46.4 million of
proceeds from
these 19 sales went to pay down debt. While top-line revenue growth has
been
impressive for several years, earnings have alluded the company,
explaining at
least in part the six month slide in the company’s stock price. Another
drag is
pending shareholder litigation against the company with complainants
claiming
that the company was less than forthcoming with material information
related to
its 2016 merger with American Realty Capital. AFIN is headquartered in
New York
City.
Go big or stay home! DUEKL is from Duke Energy.
While the company has two ETDS already trading, DUEKL is a
double-investment
grade traditional preferred stock offering 5.750 percent cumulative
dividends.
DUEKL is a temporary OTC exchange symbol; the prospectus does not
specify what
the permanent NYSE symbol will be, once assigned. DUEKL is one of the
largest
income securities issued since the financial crisis ten years ago,
raising a
whopping $1 billion for Duke. And this while centerfielder Mike Trout
was able
to convince the Los Angeles Angels to pay him $430 million and the
Troutster
did not even need to issue any type of income security (catch the ball,
throw
it to the cut-off man). It took an underwriting group of twenty-one
investment
bankers to come up with the cash to buy the 40 million DUEKL shares
from Duke. Duke
is a $66 billion regulated electric utility primarily serving the
southeast and
midwest United States.
NGLPP/NGL-C
from NGL Energy Partners, LP is an unrated 9.625 percent traditional
preferred stock paying cumulative dividends. The 9.625 percent coupon
rate will
reset on the security’s April 15, 2024 call date to a variable value
based on
the then-current three-month LIBOR plus 7.384 percent. Prospectus page
S-18
describes how the rate will be set in the event that the LIBOR rate
becomes
unavailable. NGL is a $1.7 billion partnership organized into crude oil
logistics, water solutions, liquids, retail propane, and refined
products and
renewables businesses. As a partnership, NGLPP/NGL-C shareholders will
receive
a K-1 form at tax time, rather than a 1099. The company has struggled
to post a
profit for several years. Although Q4/2018 was solid, NGL’s $23 million
in cash
seems meager for a $1.7 billion business. NGL was founded in 1940 and
is
headquarter in Tulsa, Oklahoma.
Sources:
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses:
DLR-K,
AI-C,
NEE-N,
AIG-A,
BC-C,
AFGB,
TRTN-A,
BPYPP, BHFAP, OCCIP, MRBPP/MBINP, AFINP, DUEKL, NGLPP/NGL-C
Tax treatment
The
2017 Tax Act included a provision aimed
at small
businesses that is also going to deliver an enormous benefit to those
holding
shares of preferred stocks issued by REITs (which is pretty much all of
us).
Most small businesses are incorporated as a Limited Liability
Corporation
(LLC). Under this structure, the company’s earnings are passed through
to the
owners who then pay the tax on their personal returns. The Act allows
those
receiving such income to deduct, right off the top, up to twenty
percent of
this “pass-through income.”
But
remember that REITs do the same thing as LLC’s – at least 90 percent of
a
REIT’s earnings are passed to the REIT’s shareholders primarily in the
form of
preferred stock dividends; the shareholders then pay the tax on their
personal
returns. In other words, preferred stock dividends received from REITs
qualify
under the Act’s “pass-through income” provision and are therefore up to
twenty
percent deductible. Put another way, you can reduce your taxable
dividend
income from REIT dividends by up to twenty percent under the 2017 Tax
Act. Check
your 1099’s for a line labeled “Section 199A dividends” and be sure to
consult
your tax accountant.
The
tax treatment of the taxable 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 paid by partnerships as pass-through income
or are otherwise
paid out of pre-tax profits are taxable as regular income; you pay the
full tax
since the company has not (BPYPP, NGLPP/NGL-C).
Companies
incorporated as REITs (DLR-K, AI-C, AFINP) 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, taxable 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, ETDS shareholders are on the hook for the
taxes. Income
received from ETDS’ is taxed as regular income (NEE-N, BC-C, AFGB).
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, the prospectuses for six of March’s new issues state that their
dividends are QDI-qualified (AIG-A, TRTN-A, BHFAP, OCCIP, MRBPP/MBINP,
DUEKL).
In Context: The U.S.
preferred stock marketplace
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.
U.S.-traded
preferred stocks are currently returning an average current yield of 6.8
percent (blue line) while the annual return being offered to income investors
by the 10-year treasury is 2.4 percent and that of the 2-year bank CD has turned
the yield curve upside down at 3.0 percent (shorter term money very rarely
offers a higher return than longer term money).
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 29. It is into this
marketplace that March’s new issues were introduced.
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