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JUNE 2020

Issue 159


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Top Investment Grade, Cumulative Preferreds Available Under $25



Since mid-March, the COVID-19 panic has delivered the best prices for the highest quality preferred stocks that we have seen since the 2008 Global Credit Crisis. Of the 122 high-quality preferred stocks currently trading on U.S. stock exchanges, 16 are now trading for a market price below their $25 par value, selling for an average price of $23.99 per share (May 29).

The search engine parameters seen in Figure 1 look for preferred stocks and exchange-traded debt securities (ETDS) that are currently trading below their $25 par value, have cumulative dividends (meaning that if the issuing company skips a dividend payment to you, they still owe you the money) and offer investment grade ratings from Moody's Investors Service.


Currently priced below par

Purchasing shares below $25 is an important consideration for many preferred stock investors. In the event that your shares are redeemed (bought back from you) by the issuing company, shareholders will receive the security's par value in cash in exchange for their shares. By purchasing shares below their par value ($25 in most cases and in all of the cases shown here), preferred stock investors are able to add a layer of principal protection to their investment while also positioning themselves for a downstream capital gain in the event of a future call.


Figure 1 shows the complete filter used to find the 16 highest quality preferred stocks available for less than $25. Of the twenty-five preferred stock characteristics that can be set, the four arrows highlight the keys for this search. Setting the "Currently priced below par" parameter to "Yes" does the magic here.



In addition to finding the highest quality issues that offer cumulative dividends and are currently trading below their $25 par value, this filter also limits the list to issues that have not suspended their dividend payments. And by setting "Today's price, at least" to $0.01 and "Today's volume, at least" to 1 share the filter will exclude less liquid issues (securities that have not traded today).

This is just one example. Click on the filter image to see another one along with a more detailed explanation.


The above search finds a total of 16 high quality preferred stocks that are curently trading on U.S. stock exchanges for a market price below these security's $25 par value.

Figure 2 shows the top 10 results (out of the 16 high quality securities found) when this search is applied to our Preferred Stock List
TM database (please note that to protect the values of subscriptions to our CDx3 Notification Service, the trading symbols are obscured here). Already a CDx3 Notification Service subscriber? See page 1 of this month's issue of the subscriber's newsletter, CDx3 Research Notes, for symbols.

There were a total of 915 preferred stocks and ETDS' trading on U.S. stock exchanges as the month came to a close (including convertible preferred stocks). Of these 915, there are currently 122 high quality preferred stocks selling for an average price of $25.87.


And of these 122 high quality securities, 16 have a current market price (seen in the Last Price column) that is below their $25 par value (as shown in the Liquid Price column) and enjoy an investment grade rating from Moody's, the top 10 of which are listed above.

Keep an eye out for sub-$25 buying opportunities such as those listed here. The lower your purchase price, the more principal protection you'll have.

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New Preferred Stock IPO’s, May 2020


May’s thirteen new preferred stocks are offering an average annual dividend (coupon) of 6.1 percent, an average current yield (which does not consider reinvested dividends or capital gain/loss) of 5.9 percent and an average Yield-To-Call (which does consider reinvested dividends and capital gain/loss) of 5.0 percent (using May 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 K preferred stock from Public Storage is “PSA-A” at TDAmeritrade, Google Finance and several others but this same security is “PSA.PR.K” at E*Trade and “PSA.PK” 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 122 high quality preferred stocks selling for an average price of $25.87 (May 29), 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 915 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

About the new issues

May was a big month for new preferred stocks from banks and insurance companies with 13 new issues being introduced for the consideration of preferred stock investors. Banks churned through mountains of business customers seeking PPP loans with limited staff (and paying very low rates) and insurance companies were faced with the uncertainty of increased life and lost business claims (and the litigation that will surely follow). Starting with our relationship with China, many changes will follow the COVID-19 pandemic – some very positive, others not so much.

COVID-19 is changing, at least for the time being, the way companies and individuals are able to conduct commercial and personal banking activities. According to data from researcher Justin Hart, fifty-four percent of all COVID-19 deaths have occurred within the 100 counties in or within 100 miles of New York City (May 10, 2020) which happens to be about the same geographic area served by OceanFirst Financial Corporation (OCFC). OCTFP is an unrated traditional preferred stock paying 7.0 percent non-cumulative dividends until the security’s May 15, 2025 call date. At that point, the coupon rate floats based on the Federal Reserve’s Secured Overnight Financing Rate (SOFR; currently at 0.02 percent) plus 6.845 percent. OCTFP is the bank’s first and only preferred stock. This issue raised about $54 million for this $923 million (market cap) regional bank. OceanFirst, with 54 branches throughout New York City, Philadelphia and New Jersey, was founded in 1902.

WTFNL/WTFCE is an unrated traditional preferred stock from Wintrust Financial Corporation paying 6.875 percent non-cumulative dividends. Like OceanFirst, Wintrust is a regional bank using a new fixed-to-float preferred stock issue to raise capital in a COVID-battered business environment. WTFC’s common stock has lost about half of its value since mid-February. This security’s floating rate structure is a bit unique in that the coupon resets every five years, starting out at 6.875 percent. Every five years, beginning on the security’s July 15, 2025 call date, the rate resets based on the U.S. five-year treasury rate (currently at a whopping 0.34 percent) plus 6.507 percent. Wintrust is a $2.2 billion (market cap) bank operating in Chicago, Wisconsin and Indiana. The bank was founded in 1991.

Convertible preferred stocks come in two flavors – mandatory convertibles where the issuing company determines when your preferred stock shares will convert to the company’s common stock and optionally convertibles where the power to convert, or not, is in the hands of shareholders. DHR-B is a 1.5 million share, unrated, mandatory convertible preferred stock issued by Danaher Corporation (DHR) on May 8 offering a 5.0 percent annual dividend. The company simultaneously issued about 9.5 million shares of its common stock. In addition to being convertible with a $1,000 liquidation preference, there are a few somewhat unusual things to note about these preferred stock shares. Remember that dividends are a distribution of the company’s profits to its shareholders. But the prospectus of DHR-B states that the company may use a portion of the proceeds from DHR-B to pay dividends (among pretty much anything else they could think of). Issuing a new preferred stock to pay dividends is seen by many as simply irresponsible; it’s like taking out cash against a new credit card to make the minimum payment on another credit card. The conversion formula is also more complex than usual and includes a Floor Price, an Initial Price, a Dividend Threshold and an overly-complicated explanation of the Mandatory Conversion Date (which appears to be April 15, 2023). Danaher is a $111 billion manufacturer of a variety of health and medical related devices and services worldwide. The company was founded in 1969.

BKDKP from Stanley Black and Decker is an optionally convertible preferred stock offering double-investment grade ratings (Baa3/BBB+) and 5.0 percent dividends. While the official IPO date of this security is May 8, 2020, these shares were originally marketed in May 2017 as part of an ‘equity unit’ bundle. In short, in May 2017 an investor could not purchase these Series C preferred shares separately (there was no trading symbol and the shares paid zero percent dividend). But on May 8, 2020, SWK separated out these preferred shares, made them optionally convertible, slapped a 5.0 percent dividend on them and the Over-The-Counter stock exchange gave them their BKDKP trading symbol with a $1,000 liquidation preference. These shares have a May 15, 2021 call date. A unique feature of BKDKP is that, if the shares are still outstanding on May 15, 2023 (two years after they become callable), the coupon jumps from 5 percent to 10 percent (what do you think the odds are that the shares will not be called between May 15, 2021 and May 15, 2023?). Stanley Black and Decker, founded in 1843, is an $18.7 billion company engaged “…in tools and storage, industrial, and security businesses worldwide.”

SF-C is from Stifel Financial Corporation (SF), the company’s fourth currently-trading income security. This security is nearly identical to SF-B issued in February 2019. SF-C pays non-cumulative 6.125 percent annual dividends and has a speculative grade BB- rating from S&P. Stifel is a $3.3 billion investment banking company with global operations. S&P’s BB- rating has always struck me as miserly as the company is extremely well managed with a huge, globally diversified business. Even in a difficult environment, Stifel posted $913 million in net revenue for Q1, a 19 percent increase over Q12019 and its second highest performance ever (just missing the $944 net revenue market set in Q42019). Stifel was founded in 1890 and is headquartered in St. Louis, Missouri.

AGM-E is an unrated, non-cumulative traditional preferred stock from the Federal Agricultural Mortgage Corporation (AGM), also known as Farmer Mac. Note that because of government-sponsored enterprise registration exceptions, this security does not have a prospectus; rather, it is issued via an offering circular available from Morgan Stanley. This security, AGM’s fourth currently-trading preferred stock, raised $75 million for the company. AGM was founded in 1987 and serves as a guarantor of a wide variety of loans to agricultural interests and rural utilities.

FMEEL/FMBIP is a speculative grade (Ba1/BB-) traditional preferred stock from First Midwest Bancorp offering 7.0 percent non-cumulative dividends. This Series A preferred stock is FMBI’s first, and only, income security raising about $100 million. The COVID-19 pandemic and resulting low interest rate environment have really wreaked havoc on this bank, probably more so than most. Earnings per common share went from $0.47 in Q4 2019 to $0.18 by the end of March 2020. Net Interest Income was down 3 percent from Q4 2019 with Net Non-Interest Income falling 15 percent and the company has suspended its common stock repurchase program. During the May 8 conference call, the company declared that they could “…no longer affirm previous FY2020 guidance given the inability to estimate the impact of COVID-19” – a statement applicable to many companies and individuals alike for the next several months. FMBI is a $1.5 billion regional bank headquartered in Chicago and founded in 1982.

BHFAO is an investment grade traditional preferred stock from life insurance company Brighthouse Financial (BHF). BHFAO pays a non-cumulative 6.75 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. BHFAO is the company’s third income security introduction in less than two years. The COVID-19 mess has introduced as much uncertainty for Brighthouse as it has for other insurers and banks. For the time being, however, the company reports that the COVID damage to its life insurance business has been minimal. Going forward, they estimate that their earnings will be reduced by about $70 million for every 100,000 COVID deaths. But even with the unknown risk that COVID brings to all of us, Brighthouse reported $2 billion in annuity sales during Q1, up 15 percent compared to Q1 2019 and a 33 percent increase in life insurance sales over last quarter. But like First Midwest Bancorp, Brighthouse has also suspended its stock repurchase program for the time being. Brighthouse is a $3 billion insurer headquartered in Charlotte, North Carolina.

TFCLL/TFC-O is a double-investment grade traditional preferred stock from Truist Financial Corporation offering fixed 5.25 percent non-cumulative dividends. This security, raising $500 million, is the highest rated income security among May’s offerings. Truist, formerly known as BB&T Corporation, is a $52 billion regional bank operating through about 1,900 financial centers in the Southeastern and Mid-Atlantic United States making it the nation’s sixth largest bank. Even after deducting merger costs and the impact of COVID-19, Truist turned in a solid first quarter. Net income for Q12020 came in at $1.2 billion, $0.87 per diluted share, compared to the $0.67 predicted by analysts who follow the bank. Truist has four income securities currently trading, all nearly identical preferred stocks, two of which are currently callable (TFC-F and -G, both at 5.2 percent).

BKDCL/BDXB is a speculative grade mandatory convertible preferred stock from Becton Dickinson and Company offering cumulative 6.0 fixed annual dividends with a $50 par value. Becton is offering 30 million shares of this Series B preferred stock concurrently with 6.25 million shares of its common stock. Including the underwriter’s overallotment, the preferred stock issue raises just over $1.7 billion for the company. Becton is a “…global medical technology company engaged in the development, manufacture and sale of a broad range of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare institutions, physicians, life science researchers, clinical laboratories, the pharmaceutical industry and the general public.” The COVID pandemic, as you might expect, has injected significant uncertainty and as such the company withdrew its 2020 earnings guidance on May 7, 2020. Also during May, the company converted 2.475 million shares of its previously introduced Series A preferred stock into BDX common stock. Further, on May 11, 2020 the company issued $750 million in 2.823 percent notes due 2030 and an additional $750 million of 3.794 percent notes due 2050. The proceeds from these two notes, plus cash on hand, was used to redeem $1 billion of 2.404 percent notes due 2020 and the partial redemption of $500 million of the company’s 3.25 percent notes due 2020. Additional uncertainty faces the company’s operations in the U.K. as Brexit gets underway and its continuing efforts to integrated the recently acquired operations of C. R. Bard corporation. In short, BDX, in a high-risk business to begin with, has a lot of plates spinning and is currently faced with enormous challenges from multiple angles. Becton, with 65 thousand employees worldwide, is a $71 billion company founded in 1897 and headquartered in New Jersey.

BSCFP/BSX-A is an unrated mandatory convertible preferred stock from Boston Scientific Corporation paying 5.5 percent dividends. Structurally, this security is very similar to BDXB from Becton Dickson described above and the two securities share essentially the same underwriters, with J.P. Morgan taking the lead in both cases. Where the Free Writing Prospectus for BDXB specifically states that its dividends are cumulative, that provision was removed from the FWP for BSX-A, even though the two documents both use J.P. Morgan’s format. Hence, I conclude that Boston Scientific’s new BSX-A is non-cumulative (although the FWP should have, but does not, specifically say so). Also similar to the Becton case, BSX-A’s 8.75 million shares are being introduced concurrently with 25.5 million shares of Boston Scientific common stock. BSX manufactures a wide variety of medical devices. This $53 billion company has 36 thousand employees and was founded in 1979.

FHNCL/FHN-E is a speculative grade traditional preferred stock paying non-cumulative 6.5 percent annual dividends from First Horizon National Corporation. FNH is one of several U.S. banks originally established in the south to provide banking services during the recovery from the Civil War. On April 24, the company announced shareholder approval of its merger with Iberiabank Corporation, the merger extending its market reach to eleven states. First Horizon is also in the process of acquiring multiple branch offices from Truist Financial Corporation (who also issued a new preferred stock during May, discussed above). Considering these acquisition activities, plus the COVID-19 impact, FNH had a respectable Q1, with both deposits and loan volume increasing compared to Q12019. This deposit and loan growth produced a total revenue of $478 million, an increase over Q12019 of $42 million. Earnings, however, took a hit nearly eliminating the Q1 EPS, coming in at just $0.04 per share, compared to $0.31 per share a year ago.

PNFPB/PNFPP is an unrated traditional preferred stock from Pinnacle Financial Partners, Inc. offering fixed 6.75 percent non-cumulative dividends. The good news for Pinnacle was that Q12020 revenue, deposits and loan volume were all very solid and well up over Q12019 and Q42019. The bad news is that mostly due to COVID-inspired low interest rates paid to the bank on those loans, their Q1 EPS plunged with diluted EPS falling to $0.37 from $1.22 compared to Q12019 (source: March 31, 2020 10-Q). And as a cash saving measure, the bank suspended its share buyback program, with its last transaction on March 19. With a few exceptions, Pinnacle’s first quarter looked similar to many other regional banks, scrambling to deal with the long line of business borrowers looking for PPP loans at very low rates with limited staff in branches to deal with the panic in the communities they serve. Pinnacle, a $3 billion regional bank founded in 2000 and headquartered in Nashville, operates 111 branch offices throughout the southern United States.

Sources: Preferred stock data - CDx3 Notification Service database,


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.

Unless specified otherwise, traditional preferred stock dividends, including those 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 (BKDKP).

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(none of May’s preferred stocks were issued by REITs).

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 ETDS’ issued during May).

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 (with the exception of BKDKP, all of May’s new preferred stocks pay QDI dividends). See the Status column in the first table in this article.

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 7.3 percent (blue line) while that of the 2-year bank CD is at 1.3 percent and the annual return being offered to income investors by the 10-year treasury is 0.7 percent.

For comparison, I have set the Yield column in the first table above to show the current yield of the new May preferreds on May 29. It is into this marketplace that May’s new issues were introduced.










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Preferred Stock Investing, Fifth Edition

Learn how to screen, buy and sell the highest quality preferred stocks


Preferred Stock Investing is one of the highest reader-rated books in the United States with over 100 reviews posted at Amazon.

The Fifth Edition addresses selecting, buying and selling the highest quality preferred stocks during the market conditions that we are currently facing.

See: Reviews | Table of Contents | Free Excerpt | Paperback | eBook

The Fifth Edition has 21 chapters organized into six Parts over 334 pages. Here are some highlights:

- Part I, "The Preferred Stock Market," introduces a new suite of charts and metrics specifically designed to measure and track the preferred stock marketplace.

- Part III, "Buying the Highest Quality Preferred Stocks," includes several new chapters such as "Buying 'Fed-Free' Preferred Stocks," "Keeping Up with Increasing Interest Rates" and "Buying Less-Than-Perfect Preferred Stocks."

- And chapter 8, "Managing the Risks," has been completely rewritten and expanded to include risks that are unique to preferred stocks during the increasing rate environment that awaits us.

You can pick up a copy of the new Fifth Edition of Preferred Stock Investing at your favorite online retailer such as Amazon (paperback) or directly from BookLocker, the book's publisher (BookLocker provides paperback and PDF eBook formats).













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The content of this newsletter, and the materials that it links to that are owned by Del Mar Research, LLC, are to be regarded as educational, rather than advisory. There can always be exceptions to trends and/or generalizations that may be presented herein. Consider your financial resources and goals before investing. You, and not Del Mar Research, LLC, are solely responsible for your own investing decisions.