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PREFERRED
STOCK NEWS
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,
PreferredStockInvesting.com.
Prospectuses:
OCFCP, WTFNL/WTFCE, DHR-B, BKDKP, SF-C, AGM-E, FMEEL/FMBIP, BHFAO, TFCLL/TFC-O, BKDCL/BDXB,
BSCFP/BSX-A, FHNCL/FHN-E, PNFPB/PNFPP
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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