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PREFERRED
STOCK NEWS
New Preferred Stock
IPO’s, September 2019
If
you are a seller, you should check your brokerage account. With demand
so high for U.S.-traded preferred stocks, prices are higher than we
have seen in several years. Selling your shares will deliver a nice
capital gain (which is generally taxed at a lower rate than regular
income). For many, selling your preferred stock shares in this
high-priced market is a lot like collecting your future dividend income
now, all at once. Just remember that if you choose to sell, you put an
end to your dividend income. Be sure to check with your tax advisor
before making any moves, but selling has become worth consideration.
In
anticipation of a drop in rates, buyers and those seeking to reduce
their risk continued to push up the prices of previously issued higher
payers. As the month came to a close, the average market price for all
U.S.-traded preferred stocks was $25.93, up $0.13 per share over the
last month.
September’s new issues
September’s
sixteen new preferred stocks are offering an average annual dividend
(coupon) of 6.6 percent, an average current yield (which does not
consider reinvested dividends or capital gain/loss) of 6.5 percent and
an average Yield-To-Call (which does consider reinvested dividends and
capital gain/loss) of 6.2 percent (using September 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
$26.43 (September 30), offering an average current yield of 5.3
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 919 of these securities trading on U.S. stock
exchanges
(including convertible preferred stocks).
About the new issues
ETI-
is from Entergy Texas, Inc. (EZT), the company’s first preferred stock.
First, let me say how annoying it is when the NYSE comes up with a new
preferred stock symbol that ends with a hyphen. Doing so complicates
everything for everybody for no particular reason. Stupid. As described
above, to get the correct symbol from your favorite quoting website,
replace the hyphen using the symbol convention used by your quoting
site. ETI- is a Ba2/BBB- rated traditional preferred stock offering
5.375 percent cumulative dividends. Entergy Texas, Inc. falls under the
Entergy Corporation (ETR) umbrella and offers electric power generation
and distribution.
COF-I
is a 60 million share traditional preferred stock from Capital
One Financial Services (COF) offering 5.0 percent non-cumulative annual
dividends. It would not be surprising for COF to use the proceeds from
this new 5 percent issue to redeem COF-P (6 percent, 35 million shares)
and COF-C (6.25 percent, 20 million shares). COF-P became redeemable in
September 2017 while COF-C reached its call date on September 1, 2019.
Capital One currently has seven preferred stocks trading.
FTAI-A
is a traditional preferred stock from Fortress Transportation
Infrastructure Investors, LLC (FTAI). The new FTAI-A is the company’s
first and only preferred stock and uses the fixed-to-float rate
structure. The dividend rate is 8.25 percent until the security’s
September 15, 2024 call at which time the coupon rate uses a formula
equal to the three-month LIBOR rate (currently at 2.13 percent) plus
6.886 percent. FTAI is a very interesting company, specializing in
large-scale transportation and logistics – air, land and sea. You name
it, they move it. From the company’s website “Fortress Transportation
and Infrastructure Investors LLC owns and acquires high quality
infrastructure and equipment that is essential for the transportation
of goods and people globally. FTAI currently invests across four market
sectors: aviation, energy, intermodal transport and rail. FTAI targets
assets that, on a combined basis, generate strong and stable cash flows
with the potential for earnings growth and asset appreciation. The
Company’s existing mix of assets provides significant cash flows as
well as organic growth potential through identified projects.” FTAI is
a $4 billion LLC founded in 2011 and headquartered in New York City.
PSA-I
is a traditional preferred stock offering a 4.875 percent
cumulative dividend from Public Storage (PSA). PSA is the highest rated
property REIT in the U.S. with double-investment grade ratings
(A3/BBB+). You can see by the miserly coupon on this new security how
those ratings pay off. After issuing PSA-I at 4.875 percent, the
company announced the redemption of all outstanding shares of PSA-U
(5.625 percent) for October 14, 2019. PSA-U shareholders will receive
the security’s $25 par value (plus accrued dividends) and PSA-U shares
will stop trading on that date.
BAC-N
is a 5.0 percent traditional preferred stock from Bank of
America Corporation (BAC) with double-investment grade ratings
(Baa3/BBB-). Taking advantage of today’s relatively low rates, BAC-N is
BAC’s second new preferred stock issued within the last 90 days (BAC-M
was introduced on June 18 at 5.375 percent). BAC currently has thirteen
preferred stocks trading. Like all bank-issued preferred stocks
introduced since the Dodd-Frank Wall Street Reform Act was signed into
law in July 2010, BAC-N offers non-cumulative dividends (hence allowing
the bank to count the value of BAC-N toward its Tier 1 Capital
regulatory reserves).
BFS-E
is a traditional preferred stock offering unrated 6.0 percent
fixed-rate annual dividends from Saul Centers (BFS). Dividends are
cumulative meaning that if BFS misses a dividend payment to you, they
still owe you the money (their obligation to pay you accumulates). BFS
owns a variety of retail shopping centers primarily in the Washington,
D.C. area. The company’s leadership has seen some drama lately. It
lists 86-year-old Bernard Saul II as its Chairman and CEO and, until a
few days ago, James Lansdale as its President, COO and Director. But in
a recent SEC filing, the company announced that Lansdale would be
resigning effective December 31. The announcement then went out of its
way to point out that Lansdale’s resignation “was not in connection
with any disagreements with the Company about any matter” (when they
say it’s not the money, it’s the money). The proceeds from the new
BFS-E are being used to redeem all outstanding shares of BFS-C (6.875
percent) on October 17, 2019. BFS is a $1.25 billion property REIT
headquartered in Bethesda, Maryland.
MITT-C
is an unrated traditional preferred stock from AG Mortgage
Investment Trust, Inc. (MITT) offering 8 percent annual dividends until
the security’s September 17, 2024 call date. At that time, the coupon
rate will vary based on the three-month LIBOR rate plus 6.476 percent
(page S-11 of the prospectus addresses how this rate will be calculated
in the absence of the LIBOR). MITT-C is the company’s first new
preferred stock since September 2012. MITT now has three preferred
stock issues trading, with the new MITT-C being the first to use the
fixed-to-float rate structure. Investors should be wary of this
structure. A floating rate can sound very enticing during a period of
increasing rates (which is the whole point). But that’s not the
environment we are in and are not likely to be in for some time.
Further, looking at the history (which I have done several times),
companies tend to redeem the shares on the security’s call date if they
are facing a significant uptick in the rate (but not if rates are going
down). The notion that if rates rise in the future you will be
gleefully smothered with increased dividend income is unlikely. MITT is
a mortgage REIT, making their money by using cheap cash (such as that
generated by a new preferred stock issue) to buy bundles of mortgages
that, hopefully, pay a higher rate than that cash. Mortgage REITs tend
to be more profitable during periods of low rates (now) since the cost
of investment capital is lower while the rate paid to them by the
bundles of (fixed-rate) mortgages stays the same.
DRADP
from Digirad Corporation (DRAD) is a bit unusual in a couple of
different ways. Note that the par value of this security is $10, rather
than the usual $25. There are only eleven such securities trading on
U.S. stock exchanges. Since the market price of a fixed-rate preferred
stock will tend to stay pretty close to its par value (since that is
the amount shareholders will receive from the issuer in the event of a
call), the $10 par value of DRADP presumably makes the shares more
affordable to a larger number of investors (not sure how well this
actually works out in practice). Also, while about 70 percent of newly
issued preferred stock are distributed to the marketplace using the
wholesale Over-the-Counter exchange, DRADP did not; rather, its
underwriters chose to initiate trading on the retail NGM exchange.
Founded in 1985, Digirad is a $10 million company that develops and
sells a variety of nuclear medical imaging systems.
FFFKP
is a traditional preferred stock from Fifth Third Bancorp offering 4.95
percent non-cumulative dividends. The coupon rate of new preferred
stocks is set by the underwriters at a rate that they believe market
participants will pay the security’s par value for ($25 in this case).
FFFKP is a somewhat rare case where the underwriters blew it, as this
security has not traded reached $25 since its introduction. Market
participants are saying that to take the risk associated with this
Baa3/BB+ rated security, they want a coupon of at least 5.1 percent.
It’s almost like introducing FFFKP below five percent became more
important that acknowledging the realities of market demand. On
September 11 the bank was successful in changing its state bank charter
to a national charter, another piece of its ongoing expansion plans
falling in to place. Fifth Third is a $20 billion bank founded in 1858
and headquartered in Cincinnati.
REXR-C
is an unrated traditional preferred stock from Rexford
Industrial Realty (REXR), a Southern California property REIT
specializing in industrial real estate. REXR has three preferred stocks
currently trading, all of which are virtually identical, none of which
are currently redeemable. REXR-C pays 5.625 percent fixed-rate
cumulative dividends and becomes callable on September 20, 2024. Along
with issuing REXR-C, the company has recently acquired several
properties: $18.2 million for the Eastvale development site in June;
$110.3 million to acquire five industrial properties in
early-September; and $66.2 million for an eight-building industrial
complex in mid-September. REXR-C raised about $75 million, the rest
being funded with cash on hand. REXR is a $4.8 billion REIT
headquartered in Los Angeles, California.
ATH-B
is a 5.625 percent traditional preferred stock from Athene
Holding (ATH), offering non-cumulative dividends and a BBB- investment
grade rating from S&P. ATH, founded in 2008 and headquartered in
Bermuda, is an $8 billion insurance company specializing in retirement
savings products. ATH-B, a fixed-rate preferred, is the company’s
second new preferred stock issued in 90 days with ATH-A being
introduced last June with a 6.35 percent fixed-to-float coupon.
Combined, the two new preferreds generated over $1 billion in new cash.
ATH made news this month when it announced the acquisition of the loan
portfolio of PK AirFinance, GE Capital’s aviation lending group. The
extent to which the new $1 billion in proceeds from ATH-A and ATH-B
will make the acquisition happen is unclear, however the prospectuses
of these new securities state that these proceeds will be used for
“…supporting growth…” How the acquisition of an airplane lending
company is consistent with retirement savings products is more clear to
the folks at ATH than it is to me.
YGYIP
is a fixed-rate traditional preferred stock from Youngevity
International, Inc. (YGYI), an exceedingly robust name for a company
with a sub-$5 common stock. YGYIP is the company’s first preferred
stock and offers 9.75 percent cumulative dividends paid monthly. YGYIP
is another case where the security’s underwriters appear to have
over-estimated market demand as YGYIP has not traded at its $25 par
value since it was introduced on September 20. Youngevity “…develops
and distributes health and nutrition related products and services in
the United States and internationally.” Those products include coffees,
hemp oils, skincare products and a variety of other lotions and
potions. YGYI is a $140 million company founded in 1996 and
headquartered naturally enough on the US/Mexico border in Chula Vista,
California.
AVGOP/AVGO-A
is a mandatory convertible preferred stock from Broadcom, Inc. (AVGO),
a
relatively rare preferred stock offering from the semiconductor
manufacturing industry. Broadcom has one of the most complex corporate
histories you will ever run across. Without walking through the
transactions, the company we know today has resulted from merging two
Singapore companies - Broadcom-Singapore and Avago Technologies - and
Broadcom Cayman L.P., the result of which was then “redomiciled” as a
Delaware corporation. Then last year the company acquired CA, Inc. an
infrastructure software company, and security software company Symantec
Corporation. The company’s new preferred stock, AVGOP, is equally
complex in its conversion terms which are alternatingly mandatory
and/or optional at the direction of the shareholder and/or the company
at a variety of points in time and/or under various conditions but
within certain limitations, naturally. The Free Writing Prospectus of a
new preferred stock (also known as a Term Sheet) is usually about two
pages long and summarizes the high points that are of interest to most
investors. The FWP for AVGOP is seven pages long and, after
studying it
for almost an hour, remains unclear as to what a retail investor would
be investing in. It is likely that this security, given its $1,000 par
value and complex terms, is intended for a specific buyer (which does
not include the likes of us). Move along, nothing to see here.
GLSDP/GOODN
is an unrated traditional preferred stock offering 6.625 percent
cumulative dividends from Gladstone Commercial Corporation (GOOD).
Gladstone
is a property REIT, specializing in commercial office buildings. The
proceeds from GLSDP/GOODN are being used to redeem all outstanding
shares of two older, higher-paying preferred stocks – GOODP (7.75
percent, 1 million shares) and GOODO (7.5 percent, 1 million shares).
GOOD was founded in 2003 and is headquartered in McLean, Virginia.
UTBPP/UBP-K
is a traditional preferred stock from Urstadt Biddle Properties, Inc.
(UBA),
one of two preferred stocks that this property REIT has trading. UTBPP
is unrated and offers cumulative 5.875 percent dividends. UBA
specializes in small retail centers, primarily located along Manhattan
commuter corridors. While the company acquired five such properties
during 2017, their website lists only one such acquisition during 2018
and none for 2019. UBA is a $900 million company headquartered in
Greenwich, Connecticut.
AGNIP/AGNCO
is a 14 million share unrated, traditional preferred stock from
mortgage REIT AGNC Investment Corporation (AGNC). AGNIP/AGNCO offers a
6.5
percent cumulative dividend until its October 15, 2024 call date. At
that time, the dividend paid by this security becomes variable based on
the three-month LIBOR rate plus 4.993 percent. Like AG Mortgage
Investment Trust discussed earlier, AGNC makes its money by raising
cash (such as with a new preferred stock issue) and using the proceeds
to purchase bundles of mortgages that, hopefully, pay a higher return.
AGNC has a total of four preferred stocks trading, one of which (AGNCB,
7.75 percent, 7 million shares) became callable in May of this year.
While the prospectus for the new AGNIP/AGNCO does not say so, it would
not be surprising for AGNC to use half of the proceeds from this new
issue to redeem AGNCB. AGNC is an $8.7 billion company founded in 2008
and headquartered in Bethesda, Maryland.
Sources:
Preferred stock data - CDx3 Notification Service database,
PreferredStockInvesting.com.
Prospectus:
ETI-,
COF-I,
FTAI-A,
PSA-I,
, BAC-N,
BFS-E,
MITT-C,
DRADP,
FFFKP,
REXR-C,
ATH-B,
YGYIP,
AVGOP/AVGO-A,
GLSDP/GOODN,
UTBPP/UBP-K,
AGNIP/AGNCO
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 (FTAI-A, DRADP).
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 (PSA-I, BFS-E, MITT-C, REXR-C, GLSDP/GOODN, UTBPP/UBP-K,
AGNIP/AGNCO).
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. 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 (there were no EDTS’ issued during
September).
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 (ETI-, COF-I, BAC-N, FFFKP, ATH-B,
YGYIP, AVGOP).
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
6.5
percent (blue line) while the annual return being offered to income
investors
by the 10-year treasury is 1.7 percent and that of the 2-year bank CD
has turned
the yield curve upside down at 2.4 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 September preferreds on September 30.
It is
into
this marketplace that September’s new issues were introduced.
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