PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, April 2019
Compared to March’s fourteen new preferred stock issues,
April was a quiet month. Just four new preferred stocks were introduced
during
April. But even with this small group, there was some diversity – two
pay
tax-advantaged dividends while one offers an investment grade rating.
There is
industry diversity to be found here, too – one property REIT, one
energy
partnership and two regional banks.
As the month came to a close, the average market price for
all U.S. traded preferred stocks was $25.13, up $0.20 per share over
the last
month.
April’s new issues
April’s
four new preferred stocks are offering an average annual dividend
(coupon) of 6.8
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 6.7 percent
(using April
30 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 124 high quality preferred stocks selling for an average
price of
$25.49 (April 30), offering an average current yield of 5.5 percent.
And 35 of
these high-quality issues are selling below their $25 par value,
offering an
average current yield of 5.4 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 909 of these securities trading on U.S. stock
exchanges
(including convertible preferred stocks).
Buying new shares for
wholesale
Note
that KEYLL from KeyCorp (KEY) and RXFCL from Regions
Financial
Corporation (RF) 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. KEYLL will become KEY-K and RXFCL will become RF-C.
About the new issues
SOHEP
is an unrated traditional preferred stock from Sotherly Hotels,
Inc.
(SOHO). Sotherly Hotels, Inc. owns approximately 89% of the units of
limited
partnership interest in the company’s operating partnership, Sotherly
Hotels
LP. In February 2018, the partnership issued SOHOK, an Exchange-Traded
Debt
Security (baby bond) at 7.25 percent with a February 15, 2019 call
date. The
partnership wants to redeem SOHOK, so it is selling preferred stock
units to
Sotherly Hotels, Inc. in a private placement transaction (converting
7.25
percent debt into 8.25 percent equity on the partnership’s books).
Those
holding the partnership’s SOHOK shares should expect a redemption
announcement
shortly. In turn, to generate the cash needed to purchase these private
placement preferred units from its operating partnership, Sotherly
Hotels, Inc.
issued SOHEP on April 11, paying 8.25 percent cumulative dividends.
Sotherly is
a $105 million hotel REIT established in 2004.
ETP-E
is an unrated traditional preferred stock issued by Energy
Transfer
Operating, LP (ET). Over the last two years there have been a variety
of
mergers and acquisitions that created this partnership. To summarize,
in April
2017 Energy Transfer Partners, LP merged with Sunoco Logistics. Then on
October
19, 2018, Energy Transfer Partners, LP, trading as ETP, merged with
Energy
Transfer Equity, LP. With this merger, ETP changed its symbol to ET
and, just
to avoid any confusion, its name to Energy Transfer Operating, LP. ETP
had two
preferred stocks trading at the time which kept their original trading
symbols
– ETP-D and ETP-E – and are still trading today under those symbols.
And even
though the company’s common symbol is now ET, they requested that the
NYSE
assign the symbol ETP-E to this new preferred stock. Imagine working
the phones
in their Investor Relations department. ET is using the proceeds from
this new
issue to pay down debt. This security offers cumulative dividends using
the
fixed-to-float rate structure, paying 7.60 percent until its May 15,
2024 call
date. The rate becomes variable at that time, using the three-month
LIBOR rate
(currently at 2.58 percent) plus 5.161 percent. Page S-23 of the
prospectus
explains how the floating rate will be calculated should the 3-month
LIBOR
become unavailable. This $40 billion company owns and operates a
variety of
natural gas pipelines and storage facilities throughout the US and
China.
KEYLL/KEY-K
from KeyCorp offers an investment grade rating (Baa3 from Moody’s) and
a
somewhat miserly 5.625 percent fixed dividend. Its comparatively low
coupon
probably explains why buyers have been discounting the price, as this
security
has failed to reach its $25 par value during OTC trading. The dividends
for
KEYLL/KEY-K are non-cumulative. KEY has two other preferred stocks
trading,
KEY-I issued in 2016 at 6.125 percent and KEY-J issued last summer at
5.65
percent. Most recently, KEY sold its insurance business to USI
Insurance,
producing a gain of $78 million on the sale. KeyCorp is a $17.5 billion
regional bank founded in 1849 and is headquartered in Cleveland.
RXFCL/RF-C
is a traditional preferred stock from Regions Financial Corporation
paying
non-cumulative dividends. RXFCL is one of three income securities
currently
trading from Region’s, with the other two having the symbols RF-A and
RF-B.
RXFCL/RFP-C uses the fixed-to-floating rate structure with the dividend
rate
being 5.7 percent until August 15, 2029. Normally, the dividend rate
paid by
preferred stocks using this rate structure begins floating on the
security’s
call date (May 15, 2029 in this case) so that the company is able to
redeem the
shares if the resulting rate floats too high (can’t have that
happening). But I
believe this is the first case I have seen where the rate begins
floating on a
different date, three months after the call date in this case. By the
way,
RF-A, paying a fixed 6.375 percent, became callable a long time ago
(December
15, 2017), but Regions has not called it (although they certainly could
at any
time so be careful here). While I was expecting the company to use the
proceeds
of the new RXFCL/RF-C to redeem all RF-A shares, the Use of Proceeds
section of
the prospectus says nothing about doing so. RF is a $16 billion
regional bank
founded in 1852 and headquartered in Birmingham, Alabama.
Sources:
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectuses:
SOHEP,
ETP-E, KEYLL/KEY-K, RXFCL/RF-C
Tax treatment
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 (ETP-E).
Companies
incorporated as REITs (SOHEP) 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 (no ETDS' were issued
during April).
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 (KEYLL, RXFCL).
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 2.5 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 April preferreds on April 30. It is into this
marketplace that April’s new issues were introduced.
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