PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, January 2019
Preferred stock prices ticked back up throughout January, but
are still just below these security’s $25 par value offering an
opportunity for buyers.
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.
January’s new issues
January’s
four new preferred stocks are offering an average annual dividend
(coupon) of 7.0 percent, an average current yield (which does not
consider reinvested dividends or capital gain/loss) of 6.8 percent and
an average Yield-To-Call (which does consider reinvested dividends and
capital gain/loss) of 6.4 percent (using January 31 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 126 high quality preferred stocks
selling for an average price of $24.43 (January 31), offering an
average
current yield of 5.7 percent. And 65 of these high quality issues are
selling
below their $25 par value, also offering an average current yield of
5.7
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 882 of these securities trading on
U.S. stock exchanges (including convertible preferred stocks).
Buying new shares for
wholesale
Note
that JPEEL from JP Morgan (JPM) and CFGLL from Citizens
Financial Group (CFG) are still trading on the wholesale
Over-The-Counter
exchange. These are temporary OTC trading symbols 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. While the prospectus for JPEEL does
not
disclose what its permanent NYSE symbol will be, CFGLL will become
CFG-D.
About the new issues
ENR-A
from Energizer Holdings, Inc. (ENR) is one of
the more interesting mandatory convertible preferred stocks to come
along in
quite a while. Most often, convertible preferred stocks are issued by
relatively young, speculative companies that are asking investors to
provide
capital (by buying preferred stock shares) that the company will use to
take
advantage of a supposed growth opportunity. If successful, that growth
opportunity should boost the company’s common stock value right about
the time
that the convertible preferred shares reach their conversion date,
providing
all with a massive gain. But ENR-A is from one of America’s oldest,
most
establish companies – home of the Energizer Bunny, Rayovac and Eveready
batteries along with a multitude of auto care products. The company
actually
invented the dry cell battery in 1896 and is now a $2.8 billion global
battery
supplier. ENR’s common stock lost about 20% of its value late last year
on
uncertainty regarding the proposed acquisition of Spectrum Brands’
battery and
portable lighting business for $2 billion in cash plus another $1.25
billion
for Spectrum’s auto care business. At the same time that ENR-A was
introduced
on January 14, the company also issued over 4 million shares of
dilutive common
stock. Anti-trust hurdles have since been cleared in the U.S., Columbia
and
Europe and the deal is expected to close in February. ENR-A shares,
sporting a
somewhat unusual $100 par value, will convert to ENR common shares on
January
15, 2022.
CIM-D
from Chimera Investment Corp (CIM) is an
unrated traditional preferred stock offering a 8.0 percent cumulative
dividend
until its March 20, 2024 call date. At that time, the rate will float
based on
the three-month LIBOR (currently at 2.7610 percent) plus 5.379 percent.
Page
S-12 of the prospectus explains that if the LIBOR is no longer in use
at that
time “…the alternative reference rate selected by the central bank,
reserve
bank, monetary authority or any similar institution” will be used
instead. 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).
JPEEL/JPM-? from JP Morgan Chase is currently
trading on the Over-The-Counter exchange so this is a temporary trading
symbol.
After being absent from the preferred stock market since 2015, JP
Morgan issued
JPM-D last September, and has now followed with JPEEL, a real whopper
generating
about $1.8 billion in net proceeds. A portion of the proceeds from
JPEEL are being
used to redeem all outstanding shares of JPM-B on March 1. As with all
bank-issued preferred stocks since the Dodd-Frank legislation was
passed in
July 2010, JPEEL dividends are non-cumulative (allowing the bank to
count the
value of this preferred stock towards its Tier 1 capital regulatory
reserves).
JP Morgan has issued so many preferred stocks for so many years, all
conceivable symbols have been previously used. Consequently, be very
careful
when reviewing information related to this Series EE security. JPM is a
$396
billion “Too-Big-To-Fail” bank founded in 1799.
CFGLL/CFG-D
from Citizens Financial Group offers
non-cumulative 6.35 percent dividends with a BB+ rating from S&P
(speculative grade). Like CIM-D discussed above, this security uses the
fixed-to-float dividend structure, with its current 6.35 percent
dividend rate
becoming variable on its April 6, 2024 call date. At that time, the
dividend
rate will vary depending on the three-month LIBOR rate plus 3.642
percent. Pages
S-11 and S-12 of the prospectus include a fairly extensive explanation
of how
an Alternative Rate will be identified should the three-month LIBOR
become
unavailable after 2021 for this calculation. Citizens is a $16 billion
regional
bank established in 1828 and headquartered in Providence, Rhode Island.
Sources: Preferred stock data -
CDx3 Notification Service database,
PreferredStockInvesting.com. Prospectuses:
ENR-A,
CIM-D,
JPEEL,
CFGLL
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 (BHR-D).
Companies
incorporated as REITs (CIM-D) 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, ETDS
shareholders are
on the hook for the taxes. Income received from ETDS’ is taxed as
regular
income (none of these were issued during January).
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 three of January’s new issues state
that
their dividends are QDI-qualified (ENR-A from Energizer Holdings, JPEEL
from JP
Morgan and CFGLL/CFG-D from Citizens Financial Group).
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 6.9 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 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 January preferreds on
January
31. It is into this marketplace that January’s new issues were
introduced.
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