PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, June 2019
With downward pressure on interest rates building over the
last several weeks, preferred stock issuers took the opportunity to
introduce ten new securities during June. As the month came to a close,
the average market price for all U.S.-traded preferred stocks was
$25.27, up $0.08 per share over the last month, but right where they
were twelve months ago.
June’s new issues
June’s
ten new preferred stocks are offering an average annual dividend
(coupon) of 6.5 percent, an average current yield (which does not
consider reinvested dividends or capital gain/loss) of 6.3 percent and
an average Yield-To-Call (which does consider reinvested dividends and
capital gain/loss) of 6.0 percent (using June 28 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 125 high quality preferred stocks selling for an average
price of
$25.81 (June 28), offering an average current yield of 5.4 percent.
And 29 of
these high-quality issues are selling below their $25 par value,
offering an
average current yield of 5.0 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 913 of these securities trading on U.S. stock
exchanges
(including convertible preferred stocks).
Buying new preferred stock shares for wholesale
Note
that TTONF from Triton International Limited (TRTN), ACAXP from Annaly
Capital Management (NLY), NRXPP from New Residential Investment Corp.
(NRZ) and SYNXP from Synovus Financial Corp. (SNV) 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. TTONF will become TRTN-B, ACAXP will
become NLY-I, NRXPP will become NRZ-A and SYNYP will
become SNV-E.
About the new issues
GDV-H
is from Gabelli Dividend & income Trust (GDV), part of the
Gabelli stable of Closed End Funds. Offering 5.375 percent cumulative
dividends, this Moddy’s investment grade (Aa3) preferred stock has been
trading above its $25.00 par value since it was introduced in
early-June. “Cumulative” dividends can be deferred by the issuing
company, but they cannot be suspended. If the company misses a dividend
payment to you, their obligation to pay you accumulates (they still owe
you the money). Proceeds from GDV-H are being used to redeem half of
the outstanding shares of the fund’s Series E preferred stock. This
fund was created in 2003.
ATH-A
is a 6.35 percent traditional preferred stock from Athene
Holding (ATH), the company’s first preferred stock issue. Founded last
year in Bermuda, ATH is an $8.3 billion retirement services company
that “…issues, reinsures, and acquires retirement savings products in
the United States and Bermuda.” ATH-A enjoys an investment grade rating
from S&P (BBB-) but comes with non-cumulative dividends and
somewhat unusual ten-year call protection (June 30, 2029). As with
GDV-H discussed above, ATH-A was very well received, its market price
trading above its $25 par value since introduction.
AHH-A
is the first preferred stock issued by Armada Hoffler
Properties, Inc. (AHH). Armada is a $1.1 billion diversified property
REIT specializing in office, retail and some multi-family real estate,
primarily throughout the eastern United States. AHH-A is unrated and
offers 6.75 percent cumulative dividends. The $53 million net proceeds
from AHH-A are being used to partially fund the company’s recent
acquisition of Thames Street Warf, a 260,000+ square foot office
building in Baltimore for $101 million. The company was founded in 1979
and is headquartered in Virginia Beach, Virginia.
DCUE
is a very complex security from Dominion Energy, Inc. (D),
offered as “equity units,” not preferred stock shares and has no call
date. From the prospectus: “Each Equity Unit will have a stated amount
of $100 and initially will be in the form of a 2019 Series A Corporate
Unit (‘Corporate Unit’) consisting of a purchase contract issued by us
and, initially, a 1/10, or 10%, undivided beneficial ownership in one
share of 1.75% Series A Cumulative Perpetual Convertible Preferred
Stock, without par value, with a liquidation preference of $1,000 per
share, issued by us (‘convertible preferred stock’). The purchase
contract will obligate you to purchase from us, on June 1, 2022, for a
price of $100, a number of newly-issued shares of our common stock
equal to the settlement rate, which will not exceed 1.3529 shares
(subject to anti-dilution adjustments), as described in this prospectus
supplement.” Then once you own the Corporate Units, “You can create
2019 Series A Treasury Units (“Treasury Units”) from Corporate Units by
substituting Treasury securities for your convertible preferred stock
comprising a part of the Corporate Units, and you can recreate
Corporate Units by substituting your convertible preferred stock for
the Treasury securities comprising a part of the Treasury Units, in
each case, subject to certain conditions described in this prospectus
supplement.” And there you have it. Given the alternatives available to
retail preferred stock investors, it is not clear why DCUE would be
attractive.
VOYA-B
is from Voya Financial (VOYA) offering an investment grade
S&P rating (BBB-) but non-cumulative 5.35 percent dividends. Like
ATH-A above, VOYA-B has a somewhat long ten-year call protection period
(September 15, 2029). VOYA was formerly known as ING U.S., Inc. and
“…operates as a retirement, investment, and employee benefits company
in the United States.” VOYA-B is the company’s only currently-trading
preferred stock. Note that while the description of this security as
published at the top of its prospectus refers to this security as
having a “Fixed-Rate”, it does not. The coupon paid by this security is
better described as Fixed-to-Floating since the rate, while fixed until
the security’s September 15, 2029 call date, becomes variable at that
time and resets during each “reset period” using a formula based on the
five-year Treasury rate.
TTONF/TRTN-B
is offered by Triton International Ltd., 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 of this year the company issued its
first preferred stock, TRTN-A, and used the proceeds to execute a
common share buyback (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). Some of the $121 million proceeds of
the new TTONF/TRTN-B are also being used to purchase common shares.
This is a somewhat unique strategy and will also benefit the company if
doing so increases the value of their common shares by more than the
8.0 percent in annual dividend expense they are going to incur with
this new preferred stock. Some proceeds are also being used to pay down
debt, but doing so converts debt into equity on the company’s books,
diluting common share value. TRTN is a $2.4 billion company founded in
1980 with headquarters in Bermuda.
Bank
of America (BAC) was back in the preferred stock market during June for
the second time in eleven months with its 5.375 percent non-cumulative
Series KK preferred stock, BAC-M. This security raised net
proceeds of a whopping $1.3 billion. This non-cumulative security
offers double-investment grade ratings (Baa3/BBB-). While the proceeds
from the last two BAC preferreds (BAC-B and BAC-K) were used to redeem
older issues with higher dividend rates, it is less clear that doing so
is an option for BAC-M proceeds. It’s not that BAC does not have any
older, callable preferreds to pick from; there are eight such issues
currently trading. Rather, BAC has already redeemed its older,
fixed-rate preferreds leaving only its older, variable-rate issues to
pick from. And all of these callable, variable-rate preferreds, issued
between 2003 and 2008, use the 3-month LIBOR plus a small incremental
percentage (less than one percent) as their currently-applicable
dividend rate. With the 3-month LIBOR currently at 2.35 percent, BAC’s
callable preferred stocks are costing them less than 3.35 percent in
annual dividend expense. The only BAC preferred that is at risk of
being called using proceeds from the new BAC-M would be BAC-W. BAC-W
pays a fixed 6.625 percent and becomes callable on September 9, 2019.
ACAXP/NLY-I
from Annaly Capital Management is a tradition preferred stock paying
cumulative dividends. This security offers a “fixed-to-float” dividend
rate structure, paying a fixed 6.75 percent dividend until its June 30,
2024 call date. At that time, the dividend rate of this security
becomes variable based on the three-month LIBOR rate plus 4.989
percent. Annaly is using the proceeds from the new ACAXP/NLY-I to
redeem all outstanding shares of its NLY-C (7.625 percent), delivering
an annual dividend expense savings of $2.4 million. Annaly is a $13
billion mortgage REIT founded in 1996 and headquartered in New York
City.
NRXPP/NRZ-A
is an unrated traditional preferred stock from New Residential
Investment Corp. offering cumulative 7.5 percent annual dividends. The
rate will remain fixed at 7.5 percent until this security’s August 15,
2024 call date. At that time, the coupon will float based on the
three-month LIBOR rate plus 5.802 percent. This is NRZ’s first
preferred stock. NRZ is a $6.4 billion mortgage REIT founded in 2011.
SYNXP/SNV-E
is offered by Synovus Financial Corp. with Ba3/BB- ratings. As has been
the case with bank-issued preferreds since the Wall Street Reform Act
was signed into law in July 2010, SYNXP/SNV-E offers non-cumulative
dividends (allowing this bank to count the value of its preferred stock
issues toward its Tier 1 Capital regulatory reserves). SYNXP/SNV-E is
the company’s second preferred issue with SNV-D issued in June 2018 at
6.3 percent. This security offers a “fixed-to-float” dividend rate
structure, paying a fixed 5.875 percent dividend until its July 1, 2024
call date. At that time, the dividend rate of this security becomes
variable based on the five-year U.S. Treasury Rate (current at 1.76
percent) plus 4.127 percent. Synovus is a $5.5 billion bank holding
company for Synovus Bank, a retail bank with branches operating
throughout the southeastern Unites States.
Sources:
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses:
GDV-H,
ATH-A, AHH-A, DCUE, VOYA-B,
TTONF/TRTN-B,
BAC-M,
ACAXP/NLY-I,
NRXPP/NRZ-A,
SYNXP/SNV-E,
Preferred Stock Tax treatment
The
2017 Tax Relief Act included a provision aimed at small businesses that
also delivers 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. Such income is reported to you on the 1099 for received
from your broker as “Section 199A” income.
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 (DCUE).
Companies
incorporated as REITs 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). For June – AHH-A, ACAXP/NLY-I, NRXPP/NRZ-A.
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 (no ETDS’ were introduced during June).
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 June’s new issues state that their dividends
are QDI-qualified (GDV-H, ATH-A, VOYA-B, TTONF/TRTN-B, BAC-M,
SYNXP/SNV-E).
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
6.7
percent (blue line) while the annual return being offered to income
investors
by the 10-year treasury is 2.0 percent and that of the 2-year bank CD
has turned
the yield curve upside down at 2.8 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 June preferreds on June 28. It is into this
marketplace that June’s new issues were introduced.
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