Investment Grade Preferred Stocks Still Available For Less Than $25: Q1 2013 Update

Includes: BAC, JPM, RBS, WFC
by: Doug K. Le Du

The idea that European banking officials might adopt a new bailout model, where the central banks of struggling countries are required to seize portions of citizen's savings accounts, pushed preferred stock market prices up in the U.S. right along with their common stock cousins.

Over the first quarter of 2013, the average market price of U.S.-traded preferred stocks increased by $0.23 per share to $25.67, up from $25.44 at the end of 2012 [1].

The new bailout ("bail-in") model saw its first test in Cyprus. Predictably, those lined up at ATM machines on the tiny island quickly sucked the machines dry and the run on banks promptly resulted in outright closures.

Officials there taught us what we already knew - If you're going to try to steal somebody's money, telling them in advance that you intend on doing so is not a way to secure their cooperation.

This Preferred Stock Market Snapshot (tm) chart depicts the preferred stock marketplace at the end of Q1 2013 (March 27, 2013) along with two characteristics that are usually high on the list of considerations for risk-averse preferred stock investors - current market price (above and below these securities' $25 par value) and investment risk (as reflected by investment grade versus speculative grade Moody's ratings).

Preferred Stock Market Snapshot for Q1/2013

Each diamond represents a qualifying preferred stock. An example is highlighted within each of the four quadrants. Given the events in Cyprus and the resulting effect on the U.S. equity market, it seems appropriate to use examples from financial institutions: JPM-K from JPMorgan (NYSE:JPM), WFC-O from Wells Fargo (NYSE:WFC), BAC-I from Bank of America (NYSE:BAC) and RBS-T from the Royal Bank of Scotland (NYSE:RBS) are shown with a blue diamond.

Preferred stock market trends can be identified by comparing the above ending-Q1 2013 chart with earlier quarterly iterations of this analysis (ending-Q2/2012 here | ending-Q3 2012 here | ending-Q4 2012 here).

Trend: Investment Grade Available For Less Than $25 Par

Preferred stocks that carry investment grade ratings and are trading for a market price below their $25 par value represent the sweet-spot for many preferred stock investors (green, lower left). During Q1, the number of investment grade preferred stocks selling for a market price under $25 fell to 22 issues (7% of the total), down from 36 issues three months ago (12% of Q4/2012's total).

While not nearly as robust as what we are used to, 22 issues is still plenty for most preferred stock investors to pick from.

The average market price of these 22 investment grade preferreds was $24.75, up $0.36 from the ending-Q4 value.

These 22 sub-$25 investment grade preferred stocks are providing an average dividend yield of 5.46%; not what we'd like, but certainly much better than the alternatives being offered to today's income investors (compared to the miserly 1.1% and 3.9% being offered by bank CDs and investment grade corporate bonds, respectively [2]).

Trend: More Alternatives to Pick From

There were a total of 48 new preferred stocks issued during the first quarter of 2013 (through March 27), an average of 16 new issues per month; that's about double last year's pace (see "13 New Preferred Stocks Provide 6.2% With Increased Principal Protection").

For the issues that qualify for the Preferred Stock Market Snapshot(tm) chart, the U.S. preferred stock market offered 335 alternatives to pick from as the first quarter wrapped up. That's a net increase of 23 issues from three months earlier after subtracting redemptions (which are slowing down; see "Redemption Gap: Dividends From Redeemable REIT Preferred Stocks Likely To Continue").

Trend: Prices Moved Up Despite Lower Volume

Comparing this quarter's chart to that of last quarter, what I first noticed was that all of the diamonds had moved up; the entire data set is higher on the Y-axis (price) regardless of rating. The higher prices resulted in an overall average dividend yield of 6.46%, down from 6.55%.

But even though market prices increased during the quarter, note that the average daily trading volume fell off substantially at the end of Q1 2013 compared to the end of last quarter. One explanation could be that those purchasing U.S.-traded preferred stock shares during the first quarter, while more highly motivated (pushing up prices), were typically placing smaller orders (perhaps reflecting more individual investors than institutional buyers).

Concerns are voiced every day in the financial media, warning common stock investors about the likelihood of a downward correction. While the recent run-up in common stock prices has delivered gains, the warnings are grounded in the short-term nature of the cause. The Cyprus event, and reaction to it, will subside as a more acceptable equilibrium evolves.

In that event, look for preferred stock market prices to return to something closer to Q4/2012 levels as well. We'll see how it looks when I provide you with an update to this Preferred Stock Market Snapshot (tm) at the end of June.


[1] Source for all preferred stock data in this article: CDx3 Notification Service database and Preferred Stock Investing, Fourth Edition ( Of the 959 preferred stocks and exchange-traded debt securities trading on U.S. stock exchanges at the end of March 2013, preferred stocks and exchange-traded debt securities used for this chart include those that:

  • have a par value of $25.00;

  • are currently trading on U.S. stock exchanges (excluding the Over-The-Counter exchange);

  • are rated by Moody's Investors Service;

  • do not have an announced redemption that is pending;

  • are paying dividends (issues with deferred or suspended dividends were excluded);

  • have a fixed dividend rate (preferreds with variable or adjustable dividend rates were excluded);

  • had a non-zero trading volume on the day that the data was collected (March 27, 2013); and

  • are not convertible to another type of security.

[2] Bank CD interest rate is the average APY of the top ten 24-month certificates being offered by U.S. banks on March 11, 2013; source:

Corporate bond yield is the average daily yield offered by investment grade corporate bonds during March 2013; source:

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 traded on U.S. stock exchanges used for this article.

Additional Disclosure: I 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.

Disclaimer: Securities identified within this article are for illustration purposes only and are not to be taken as recommendations.