Author's note: This introductory article will explain how and why I became a preferred investor, and will provide the basics necessary to fully appreciate and understand my research process in making an investment decision for the preferred equities of a particular company.
When considering the acquisition of Costamare, Inc. (NYSE:CMRE) preferred shares, CMRE-B, C & D, it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.
Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to Costamare, Inc. Below is a snapshot of a slice of that page:
A quick review informs us that Costamare is a leading international owner of containerships with long experience in container transportation, and holds contracts with some of the world's largest liner companies. What I liked is that it had a market value of $1.5 billion, which unfortunately has now shrunk to approximately $750 million. In my experience, companies having less than a billion dollar market value are more prone to bankruptcy than larger companies in the event company-specific, sector-specific, or general market forces might turn against them. However, given the present circumstances of the sector the reduced market value does not overly concern me.
Let's click "Find Related Securities" to examine any preferreds this company has to offer:
Here we learn that CMRE offers three preferreds, (CMRE-B, C, & D), which are offered at respective interest rates of 7.625%, 8.50%, and 8.75%. I find it a bit troubling that the later issues were offered at increasing coupon rates of interest. Not terribly expensive borrowing, but troubling. However, understandable considering the continuing headwinds buffeting the containership sector of shipping.
Now let's click on CMRE-D itself. Because this page contains more information than can be covered in a snapshot view, I suggest you open the page and view it as I discuss the information that interests me:
- I like that this preferred is cumulative, meaning that in event that payments are suspended, they accumulate and are owed the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more sanctions and restrictions placed on the company, and will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds. Although bank preferred dividends are usually secure, they are almost always non-cumulative, consequently, I, don't buy them.
- These shares are callable at the company's option on 5/13/20 at $25.00 plus any accrued interest owed.
- They pay a dividend of $2.1875 per share per year, or 0.546875 per quarter, paid 1/15, 4/15, 7/15 & 10/15 of each year.
- At the time of their IPO these shares were unrated by Moody or S&P, which really doesn't concern me, but might concern a more conservative investor.
- These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $25.00 call value plus any accrued interest owed.
- Dividends are eligible for the preferential income tax rate of 15% or 20% depending upon the holder's tax bracket, which is a big plus. In addition, the company might consider such payments as return of capital, ROC, requiring no tax payment each year it is collected; with the understanding that it will reduce the cost of acquisition of those shares by the amount of dividends paid and not taxed, which will ultimately affect the capital gain or loss when the stock is sold or called.
- As usual, preferreds upon liquidation, rank senior to commons and junior to debt, both secured and unsecured.
However, simply knowing and understanding the preferred issues of a company in no way allows one to gauge a company's long-term health or fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers, and at least marginally, understand a company's financial statements and conference calls. Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interest in mind rather than those of the preferred shareholder, which, on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.
Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually visit two web sights to get an abbreviated, yet broad-based view of the particular company I'm considering investing in. They are Yahoo Finance and Finviz. I have cued each to open to the financials of CMRE.
Above is a screenshot of CMRE's 5 year chart, which, as far as I'm concerned is not a pretty picture, although understandable. The price of its shares during this time has trended down with a recent bump up to its present price of $10.10. I find its debt/equity a reasonably manageable 1.55, and long-term its 1.34. Good for this sector. Mystifyingly so, during the past two years, CMRE has increased its common quarterly dividend from 0.27 to the present 0.29 per share.
Above is a screenshot taken from a Finviz view of CMRE's present financial highlights. Glaringly, the company's market value has been reduced to $742.81 million dollars. It also showed an income of $125.90 million, and although it has recently trended higher, its stock price over the past year has fallen by approximately 41.72%, yet has recently risen by 57.86% during this last quarter.
According to the Yahoo chart above, CMRE placed solidly in the middle of its peer group in a very tough sector, which all performed negatively compared with the S&P. Understandable and unsurprising considering the plight of the container shipping sector. Its above charted peers are: Diana Shipping (NASDAQ:DCIX), Navios Maritime Partners, (NYSE:NMM), Global Ship Lease, (NYSE:GSL), and Seaspan Corp. (NYSE:SSW).
The final chart illustrates the 1 year price movement of the preferred issue CMRE-D we are interested in acquiring. It is a relatively new issue, IPO 2015. Initially, its price hovered above $25.00, which fell as the year progressed and the sector was further beset by low shipping rates. Recently, its shares have respectively risen along with several of its peers indicating a possible resurgence of this sector. For those of you interested, I have included this link to an article celebrating the 60 year birthday of the containership industry. It call container shipping the glue that binds the world's economy, and promises that it will continually grow, which I agree with. In my opinion, in time demand will catch up to supply and prices will rise to where the sector is profitable once again.
My bottom line decision is to look at charts of the past few years performance of the company's common shares, coupled with whether or not said company is, over time, prospering or losing market value. Ultimately, I have to decide how safe this company is from an existential standpoint rather than how well its share price will perform over the next quarter or the following year. Ultimately I must decide whether or not I believe in the long-term survivability of CMRE, which I do and have wagered a significant amount of capital on. Should you decide to take the plunge, at this moment the D Series is the best buy. Before you buy, you might want to do your own due diligence. For those of you who do, I direct you to the SA transcript of their recent conference call. My advice is simply my opinion, and you know what they say about opinions and how everyone has one. It's your money, invest with care. As a bonus for being a patient audience, I worked out the math below, which takes into account todays prices, which might change tomorrow and accordingly the best choice might change. You know the formula, it might be wise to do the math prior to placing your bid.
Disclosure: I am/we are long CMRE-C, CMRE-D.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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