Barclays (BCS) is the well-known global bank based in the UK offering a wide variety of banking and related products to its many customers. The shares listed here in the US provide investors with a very small 1.4% yield so for income investors, BCS may not be on the radar. However, the company does have some US-listed preferred shares and in this article, we'll take a look at the company's Non-Cumulative Callable Dollar Preference Shares Series 2 (BCSPR, may differ depending on your broker) to see if adding some international diversification to your income portfolio is right for you.
BCSPR is a traditional preferred stock, meaning it isn't backed by any kind of debt issue and pays regular, quarterly dividend distributions. Issued at $25 per share, the annualized dividend of $1.65625 means a coupon yield of 6.625%. Shares are currently trading at a small discount to their issue price at $24.70 and as a result, the current yield of BCSPR is a bit higher at 6.7%. This is a nice yield and in particular, from a global banking giant like Barclays. You can certainly find higher yields in the preferred market but from issues with a household name like Barclays, this is a nice yield.
Unfortunately, this preferred, like many from large financials, is non-cumulative. With this being the case Barclays can miss dividend payments and is under no obligation to make them up to holders of BCSPR. You can judge for yourself if repayment risk is a credible threat on BCSPR but in the event that it happens, not only will you not be entitled to receive your missed dividends but shares will likely plummet on the news. As with any other issuer of securities, if Barclays ever wanted to access the capital markets again it wouldn't miss dividend payments on its preferred shares. However, it is something to be aware of since it could technically happen at some point in the future.
On the plus side, dividends from BCSPR are eligible for the preferential dividend tax treatment, offering holders a nice boost in the after-tax yield of BCSPR over a debt issue with similar characteristics. This clause can mean a material difference in the after-tax yield of BCSPR for some holders, depending on their particular tax situations, and is certainly nice to have if you are considering BCSPR for a taxable account.
Since BCSPR is a traditional preferred it has no stated maturity date. However, Barclays has the option to call BCSPR at any time for the full $25 issue price. Since shares are currently trading at a small discount to that price, holders who buy now would be entitled to a 30 cent per share capital gain in the event it was called. However, given the relatively low coupon rate of this preferred I would suggest the threat of a call is pretty low as Barclays has higher yielding debt and preferreds it would likely redeem before this one. Nevertheless, it is something to keep in mind.
BCSPR, more than some other income securities, is subject to interest rate risk. Not only is the underlying company's business largely dependent upon interest rates but this security in particular is susceptible to swings in interest rates. Since BCSPR is perpetual it has the added volatility of having no yield to maturity income investors can use to price the issue. In addition, it is non-cumulative so its perceived safety is diminished over a similar issue that is cumulative. These things mean that BCSPR is likely to move up and down as interest rates reset higher and lower over the course of the time. This is something holders of BCSPR must be okay with as capital losses and gains are going to occur if you hold BCSPR. The point is to collect the dividends so make sure you don't try to trade around BCSPR.
Barclays offers investors a global franchise in banking that has proven to be strong over time. The common shares listed in the US pay a paltry dividend but income investors can take advantage of the strength in Barclays' business by owning BCSPR. If you can stomach the potential moves in the interest rate markets BCSPR could provide your portfolio with a boost of income from a global banking giant and with preferential tax treatment as an added bonus.