- Markets are inefficient.
- Public Storage Preferred Series O currently has a negative yield-to-call.
- Investors reaching for yield need to be more aware of the risks they are taking.
Proponents of the efficient market hypothesis routinely question if there can be such a thing as a mispriced asset. After all, if all investors are trading with the same information then how can such a thing happen?
Since June I have been following Public Storage (NYSE:PSA) with the intent of buying some of their preferred shares. I had been looking for a preferred stock in which I could invest that would give a nice yield while insuring the safety of my principal. I came upon PSA when running a screen and it seemed to fit the bill. Since there are multiple series of preferreds I created a spreadsheet to see which series was giving the best possible yield-to-call within a time frame I was comfortable with (see below). While there is no guarantee that any of the preferreds will be redeemed at the first date possible, as far as I can tell, PSA has historically redeemed their preferreds within a short time of the preferreds eligibility for redemption.
In the end I bought Series-U. Why I chose this series over the others is not important nor is it the reason for this article. Instead, I would like to discuss the Series-O (PSA-O) preferreds, first redeemable on April 15, 2015. All current outstanding series are redeemable at later dates, so Series-O naturally has a lower yield-to-call than any of the other series. However, my little spreadsheet shows that Series-O is actually sporting a negative yield-to-call and has been for some time.
List of Prfds. Series
Yield to Price
Yield to Call
This means that people buying Series-O preferred shares are actually betting that Public Storage won't redeem this series on time. Now regardless of if that is true, why are investors willing to take that risk? The most likely answer is investors aren't paying attention to the yield-to-call and are instead looking at the straight dividend yield. The Series-O offers a dividend yield of 6.525%, which is higher than any of the other yields offered by PSA preferred shares, the closest being the Series-P.
What strikes me as crazy is that investors will take the risk of losing money (remember, negative yield-to-call) for the chance at getting an investment with a dividend yield only 31 basis-points greater than one that guarantees a profit (see Series-P), even if redeemed at its first possible date. Either this is another proof of inefficient markets or people are knowingly willing to risk losing 1.77% on their investment for a (slim) chance at a little more money should the Series-O not be called within a short time of its call date.
In fact, in order for the Series-O to have a yield-to-call equal to the Series-Q (which currently has the smallest positive yield-to-call), Series-O would have to be called in July. 2015. Yet if one bought the Series-P, which is redeemable in Oct. 2015 (just 3 months longer) they would receive a yield-to-call of 2.19% . Clearly the length to maturity isn't much of a factor.
Investors who are reaching for yield may not realize that they must look at the yield-to-call of investments with maturity dates. These investors are literally betting that they will lose money. A self-fulfilling prophecy if I've ever heard one!
Additional disclosure: I am long PSA-U.