Ryan Brennan

Long only, dividend investing, banks
Ryan Brennan
Long only, dividend investing, banks
Contributor since: 2012
Thanks jcl1969 - the callable date for each security is in the first summary table at the start of the article. I felt that since all three securities were originated in 2015 (and not callable until 2020) that it wasn't as pertinent to discuss in detail. That being said, I can see how it would be helpful to highlight the callable details for each security in future articles.
I don't think that fixed to floating rates will necessarily be called if their rate increases when it becomes a floater - it really depends how the floating rate stacks up against the rate that the institution can issue new preferreds at at that time.
Thank you, Randy. I also like the fixed to floating rate preferreds and think that anyone who is looking to build a preferred stock portfolio should own some fixed to floating as well.
A lot of the fixed to floating financial preferreds have run up in price, so I don't think that all of them are as compelling investments as they once were. Personally, I think that having a mix of fixed preferreds and fixed to floating preferreds (purchased at the right level) can make for a great portfolio (especially if you don't think that rates are going to spike and you have a shorter investment horizon - maybe 5 years).
Thank you, Mary!
Thank you, John Huss. I think it's very important for everyone to figure out their current yield threshold prior to making any investment.
Thank you, pouellet. BANC-C and BANC-D are both good higher-rate investment options (BANC-C is 8.00% and BANC-D is 7.375%). They are both pretty thinly traded, so anyone who would need to sell the shares in a hurry could get beat up on the bid/ask spread (BANC-C is currently 26.35/26.80 and BANC-D is tighter at 25.90/25.95).
I don't think that any market can be perfectly efficient so there's always going to be some element of inefficiency between securities issued by the same institution. I don't think that there is anything major that you are missing.
Given that preferred stocks are much less mainstream and are not going to be day traded (given volumes and the typically longer investment horizon), I think that these price discrepancies can help narrow down a final investment decision.
Thank you, hiteshastan
It is true with fixed rate instruments. I don't believe that rates are going to spike, so there shouldn't be any drastic price movements based on comparative interest rates.
You can always get involved through a preferred stock ETF rather than individual preferred stocks (PGF, for example)
QuantumOnline has the exchange listed, so if it's not on an exchange it will say so on there. That's probably the best way to figure it out.
I focus primarily on financials (banks, REITs, insurance companies) and do not personally have any preferreds in energy companies (I just haven't spent the time to fully understand the underlying companies themselves)
Given that they are essentially 3.50% preferreds right now, I think they are pretty evenly matched with fixed rate preferreds in terms of interest rate sensitivity
3 month LIBOR is currently 0.59%
For comparative and informational purposes, 3 month LIBOR was 0.25% one year ago
WFC-Q: 3.680%
MS-I: 4.298%
GS-J: 4.230%
RF-B: 4.126%
ZB-G: 4.830%
bankrate is a good source for rate information - here is the link to the LIBOR page: http://bit.ly/1oQLnsI
Thank you, PapaAlan
QuantumOnline is a great resource for preferred stocks and I agree with the donation mentality
Thank you, postal8081
Here's a link to the quote on CNBC: http://cnb.cx/1Oj3007
Thank you for your comment, Ernie Mac
USB-H (the ticker symbol for USB Series B) is a good option right now as well
It is paying at it's floor rate of 3.50% and, as you mentioned, is trading well below par at $21.34. I think it's a good short-term option that will not be called (but great upside if it is called - and it is currently callable). For long-term, the spread over 3M LIBOR is 0.60%, which is a lot lower than recent issues (but most likely won't come into affect for a long time as it keeps paying the floor rate of 3.50%).
My hesitancy with the position is that as rates increase, the price will continue to decrease (it's been on a slight downward trajectory since mid-2014 after falling off a cliff mid-2013 and climbing back in early 2014).
It goes ex-dividend on 12/29 with a dividend payment of $0.2236 payable on 1/15
bsorge - yes, that is an oversight on my part. The callable dates on all of the above are when they switch from fixed rate to floating rate securities:
WFC-Q 9/15/2023
MS-I 10/15/2024
GS-J 5/10/2023
RF-B 9/15/2024
ZB-G 3/15/2023
Thank you, William
pouellet - thank you for the comment.
I am long a lot of fixed rate preferreds as well. I think it's dangerous to view any preferred stock as a cash equivalent, but it is a great point that you should look at the amount of issue as well (as it will have a direct affect on the trading volume).
I do want to point out to anyone who doesn't regularly trade preferred stocks that if you are looking to purchase when they are still on the pink sheets/OTC, there is going to be very limited volume (and the bid/ask spread is going to be pretty wide).
I think Citigroup, Bank of America, and some of the European banks have interesting preferreds, but I certainly understand why you would be hesitant to invest.
The reason I referenced fixed-to-floating rate preferreds in this article is that while 6% may seem great right now, there may be a time in the future when it is not as compelling and the price that you will be able to sell the preferreds at will be lower as a result. I agree that you should select a fixed rate preferred stock with the intention of owning it forever - however an investor's circumstances may change and the cash may be required so why not build in the extra protection?
AHL-C is definitely a compelling investment - it closed today at $25.28 and when it becomes a floating rate security after 7/1/23, it will pay 3M LIBOR plus 4.06%
Thanks for the comment, Randy
I chose GS-J over GS-K due to their respective current prices and spreads once they both become floating rate securities
GS-K closed at 27.15 today (current yield of 5.870%)
GS-J closed at 25.17 today (current yield of 5.463%)
The bottom line is that the extra $1.98 you're currently paying for GS-K versus GS-J is going to take you 9 years to make up (GS-K at 6.375% has an annual coupon of $1.59375 and GS-J has an annual coupon of $1.375, so an annual difference of $0.21875).
GS-K becomes a floating rate security after 5/10/24 at a rate of 3M LIBOR plus 3.55%
GS-J becomes a floating rate security after 5/10/23 at a rate of 3M LIBOR plus 3.64%
It depends where you think 3M LIBOR will be during that one year where GS-J is a floater and GS-K is still paying 6.375% (which will be 7.5 years - 8.5 years from now), and after that GS-J picks up (a whopping...) 9bps every year... or 2.25 cents...
The bottom line is that I think it's a tight long-term race between the two securities given their current prices, so there's no overly compelling reason that I can see to buy GS-K over GS-J at this time
batman2 - thank you for the comment
deskandchairs - thank you for the great response
All of the above are perpetual preferreds (the same as any of the fixed rate preferreds that are issued by banks) that have a call date and no maturity date.
deskandchairs - you are spot on that this is about mitigating interest rate risk for the investor. As rates (eventually) increase, the price on the fixed rate preferreds will decrease as the coupon becomes less competitive and the same banks have to issue new preferreds at higher rates.
Scottrade uses p instead of -
MS-I is MSpI
For anyone else looking for another online investment platform, I just made an Instablog post with a reference table for preferred stocks:
"However, June 7th was less than two weeks ago. Book value certainly has not fluctuated massively in this short time, which included two weekends of no trading."
There has been a lot of movement in the Agency MBS space in the past couple of weeks, so assuming that there has not been movement in book value based purely on time is flawed.
For some very rough math, AGNC's 30 yr MBS portfolio has an average coupon of 3.70%. In their presentation that you link to you can see where FNMA prices were as of 6/7. Using the Fannie prices around the 3.70% coupon, there has been some major price movement that would have a very large negative impact to AGNC's book value:
FNMA 3.50 - 6/7 price 103.17 - 6/21 price 100.72 (100-23)
FNMA 4.00 - 6/7 price 105.27 - 6/21 price 103.50 (103-16)
FNMA 4.50 - 6/7 price 106.72 - 6/21 price 105.72 (105-23)
Prices can be found on Mortgage News Daily: http://bit.ly/17a2wZL
These impact of these price changes is also multiplied because of the leverage that AGNC (and all mREITs) use.
I am long the mREIT space (including AGNC). It's important that investors have an understanding of what they are getting themselves into and, in terms of mREITs, what price changes in the underlying securities will do to book value even over a short period of time.
One final note - MTGE is a hybrid mREIT, not a commercial mREIT.
Annaly traded ex-div yesterday (3/27), which is one of the reasons that they were down. ARMOUR has been slowly climbing back since announcing their dividend cut.
NIM is very important, though I think it's important to look at all of the different metrics together.
Thanks Revelation 14:6 - For this article I was specifically focusing on new issues. In terms of GS-D, it is also a non-cumulative preferred. The difference between it and the ones mentioned in this article is the fact that it is a variable rate preferred while the above are all fixed rate.
GS-D pays the minimum of 3 Month LIBOR plus 0.67%, or 4.00%. It closed yesterday at 23.25, which gives it a current yield of 4.30% (quarterly coupon of $0.25).
Compare that with GS-I (Goldman's latest preferred), which has a fixed coupon of 5.95% and closed yesterday at $25.20. The position has a current yield of 5.90% (quarterly coupon is $0.371875).
The big difference between these two positions is that with the variable rate coupon you are protected when rates rise (although 3ML must be 3.35% for it to make an impact on your coupon and it's currently at 0.28%). The thing to figure out is is the 1.60% that you give up in current yield worth that protection? Looking at it another way, is it worth taking a current yield that is 27% lower for that protection?
In terms of a company not making a preferred dividend payment, it's not nearly as simple as a company simply choosing to pay or not. Missing a dividend payment is a severe sign of financial distress and not a game that companies will play (especially financial companies). Additionally, companies cannot pay a dividend on their common stock without first paying the dividend on their preferred stocks. This means that a if a company wants to play the game of skipping preferred dividend payments, they will have to suspend their common dividend as well - a huge PR problem for an industry trying to climb out of the financial crisis.
It's also important to look at the capitalization ratios of the issuing company and ratings on the preferreds themselves. There's a reason that the higher coupon preferreds are all non-investment grade and that Wells is the only investment grade preferred on the list (PRH is as well, but it is exchange traded debt - higher in the capital structure so not an apples-to-apples rating comparison).
You are correct in stating that if a non-cumulative preferred stock misses a dividend payment they are not obligated to pay you the missed dividend at a later date, whereas a cumulative preferred stock only defers and does not forfeit this payment.
When I started writing about preferred stocks on SA it felt very redundant to highlight the risks of investing in preferreds in every article (though it did seem necessary because they are unique investments). To avoid this redundancy, I wrote an article titled "Navigating the Risks of Buying Bank Preferred Stocks". In that article there is a section titled "Risk of Missing Dividend Payments". That section discusses, among other things, the difference between cumulative and non-cumulative preferreds.
I link to that article at the end of every article that I write about preferred stocks. The link isn't obscurely buried - it's at the end of the article and titled "Risks of Preferreds".
Here's the link again since you seem to have skipped over it: http://seekingalpha.co...
Obviously this needs to be highlighted in a different manner because you skipped over it to blast some all caps comments and take a few unwarranted swings. I would appreciate some help from you in how to highlight this better for readers.
bsorge - I will do my best, though since I focus a lot on bank preferreds (and new bank preferreds are not cumulative), it's going to be tough to come up with a solid list. The exchange-traded debt is all going to be cumulative, so PRH (for example) will be cumulative. A couple recent exchange-traded debt new issues are:
PRH - Prudential Financial - 5.70%
SGZA - Selective Insurance Group - 5.875%
GEH - General Electric Capital Corp - 4.875%
ALL-B - Allstate Corp - 5.10% (trades ex-div 3/27. It's traded up since its IPO but could trade at an interesting level tomorrow morning).
Thanks poclerk. It's a REIT, so different beast then the banks mentioned above. DDR is a traditional REIT (not to be confused with an mREIT) that owns retail properties.
DDR-K is cumulative. Dividends are not QDI, so they are not eligible for the 15% tax rate.
Overall, definitely worth taking a closer look at.
The preferred ETFs and closed end funds are always worth taking a look at, especially if you do not want the hassle of tracking many individual positions and companies. You lose the QDI tax treatment (so no 15% tax rate) but you gain diversity (and possibly sleep).
You do gain exposure to companies/industries that you otherwise may not want, so that's always something to be aware of as well.
In terms of JPI, you are getting a lot of exposure to non-cumulative preferreds. Many others have mentioned their aversion to them, so I figured I would highlight their prevalence in this (and other Preferred ETF) fund(s). The fund also uses leverage, so there are additional risks there.
The Nuveen website has a good overview of the fund, including all of the holdings on a line-by-line basis:
The NAV of the fund (as of 3/25) is $25.68, so you are picking it up at a discount. The share price has remained fairly steady since inception in July 2012 while NAV has grown from $23.88 at the IPO.
Hope this helps! Let me know if you have any other questions.