New Preferred Stock IPOs, March 2016

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Includes: AFSI, BBT, BOFI, HBAN, KKR, SHO, STAG, WRB
by: Doug K. Le Du

Summary

There were eleven new preferred stocks introduced during March 2016, the most since September 2014, offering an average current yield of 6.1 percent.

The annual return being offered to income investors by the 10-year treasury is 1.8 percent and that of the 2-year bank CD is a meager 1.5 percent.

Given these income alternatives, demand for U.S. preferred stocks remains very high with the average market price of these securities increasing during March by $0.75 to $25.04 per share.

Preferred stock investors were treated to the highest number of new introductions during March 2016 than any other month since September 2014. There were eleven new preferred stocks issued during the month, bringing the total number of these securities trading on U.S. stock exchanges to 898.

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. Anxious to sell the new shares, underwriters will generally sell to broker/dealers who sell them to us within a few days of the IPO date.

In addition to offering a relatively robust field to pick from, the eleven new March issues are from a diverse group of industries including banks: HBANO from Huntington Bancshares (NASDAQ:HBAN), BOFIL from BOFI Holding (NASDAQ:BOFI) and BBT-H from BB&T Corp. (NYSE:BBT); property REITs: STAG-C from Stag Industrial (NYSE:STAG) and SHO-E from Sunstone (NYSE:SHO); insurers: AFSI-E from AmTrust (NASDAQ:AFSI) and WRB-C from W.R. Berkley (NYSE:WRB); utilities: SCE-K from Southern California Edison (SCE) and ENO from Entergy New Orleans; and asset management: GBQTP from Gabelli and KKR-A from KKR & Company (NYSE:KKR), a master limited partnership.

Note that Gabelli's GBQTP, just introduced on March 28, is still trading on the Over-The-Counter exchange. GBQTP is a temporary trading symbol until this security moves to the NYSE as GAB-J (see "Preferred Stock Buyers Change Tactics For Double-Digit Returns" for an explanation of how the OTC can be used to purchase shares for discounted prices during a period of high preferred stock prices).

(Sources: Prospectuses BBT-H, SCE-K, WRB-C, SHO-E, BOFIL, AFSI-E, STAG-C, KKR-A, HBANO, ENO, GBQTP. CDx3 Notification Service database, PreferredStockInvesting.com)

About the New Issues

BBT-H, SCE-K, WRB-C and ENO all offer double investment grade ratings but, as is usually the case, are also among the lowest dividend payers. KKR's KKR-A offers an investment grade rating from S&P and a more generous 6.75 percent coupon, but KKR is structured as an MLP, so shareholders will receive a K1 at tax time rather than a 1099. Huntington's HBANO splits the difference with its Moody's investment grade rating and offers a 6.25 percent coupon.

As with almost all new bank-issued preferreds since 2010, the non-cumulative dividends from Huntington, BOFI and BB&T are designated as Qualified Dividend Income (QDI). Insurer AmTrust's AFSI-E and Gabelli's GBQTP are also QDI-designated, offering favorable tax treatment to many buyers.

GBQTP and Southern California Edison's SCE-K are relatively rare cases where cumulative dividends are also QDI-designated. From page 5 of SCE-K's prospectus:

Distributions constituting dividend income received by a non-corporate U.S. holder in respect of the Trust Preference Securities generally represent "qualified dividend income" for U.S. federal income tax purposes, which is not taxed at ordinary income tax rates, but instead is taxed at more favorable capital gain rates for U.S. federal income tax purposes.

See "Hidden Risks Of Tax-Advantaged Preferred Stocks" for data regarding whether QDI preferreds are really advantageous.

ENO from Entergy New Orleans is interesting in that this security is an Exchange-Traded Debt security which is actually a bond, recorded on the company's books as debt rather than equity. WRB-C and BOFIL are also ETDs (green font seen in the above table). But what makes ENO interesting is that it is a "mortgage bond," meaning that the physical assets (mainly buildings and other property) that Entergy has in New Orleans serve as collateral against this debt.

SHO-E from Sunstone Hotel Investors is a 4.6 million share issue with a 6.95 percent coupon, costing the company $8 million per year in dividend expense while raising about $111 million. These proceeds were used to redeem the 4.0 million outstanding shares of the company's 8.0 percent SHO-D on April 6. Interestingly, this move does not save the company any money; the new issue's 4.6 million shares at 6.95 percent produce the same dividend expense obligation as the old 4.0 million shares at 8.0 percent.

In Context: The U.S. Preferred Stock Marketplace

So how do the eleven new March issues stack up within the context of today's preferred stock marketplace?

Since the Fed announced a rate increase last December, U.S. preferred stock prices have been generally lower (rates and prices of fixed-return securities tend to move in opposite directions). But that changed during March.

The data being charted here is limited to call-protected issues in order to limit the price distorting effect of an anticipated redemption.

Going into December of last year, the average market price of U.S.-traded, call-protected preferred stocks and ETDs was $24.86 per share and remained below that level until March 18, closing at $24.91 that day.

While the continuing strong demand for U.S. preferred stocks can be attributed to several factors, the next chart makes it pretty clear that the lack of attractive alternatives is certainly among them. U.S.-traded preferred stocks are currently returning an average current yield of 7.2 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.8 percent and that of the 2-year bank CD is a meager 1.5 percent.

It is into this marketplace that March's new issues were introduced.

For comparison, I have set the Yield column in the first table above to show the current yield of the eleven new March preferreds on March 30.

While we are still in a relatively high-priced preferred stock market, the after-tax/after-inflation returns being offered to income investors by the alternatives are essentially non-existent.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The CDx3 Notification Service is my preferred stock email alert and research newsletter service and includes the database of all preferred stocks and Exchange-Traded Debt securities used for this article.