New Preferred Stock IPOs, February 2016

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Includes: BANC, EBAY, FRC, GS
by: Doug K. Le Du

Summary

There were four new preferred stocks introduced during February 2016.

Compared to the macro U.S. preferred stock market offerings, February’s new issues offer relatively weak returns.

Two of the new issues offer double investment-grade ratings (Moody’s and S&P).

eBay entered the Exchange Traded Debt Security market, offering a baby bond with a 6.0 percent coupon.

There were four new preferred stocks issued during February 2016, bringing the total number of these securities trading on U.S. stock exchanges to 888. New Preferred Stocks February 2016

As of February 29, EBAYL had yet to start trading so it appears with zero volume and last trade price in our database, but is expected to begin trading within the next few days.

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.

As with last month's new preferred stock IPO's, banks were well represented in February (see "New Preferred Stock IPOs, January 2016"). BANC-E is from Banc of California (NYSE:BANC), GS-N is from Goldman Sachs (NYSE:GS), FRC-G is from First Republic Bank (NYSE:FRC) and EBAYL is from eBay (NASDAQ:EBAY).

(Sources: Prospectuses BANC-E, FRC-G, GS-N, EBAYL. CDx3 Notification Service database, PreferredStockInvesting.com)

About the New Issues

While ratings are somewhat controversial, the benefit to the issuer is clear here; the two lowest coupon securities are offered by the two companies with double investment grade ratings (unrated securities are coded as NF - Not Found).

As has been the case since 2010 when the Wall Street Reform Act was signed into law, new bank-issued preferred stocks offer non-cumulative dividends. On the upside, February's three new bank issues are all designated as offering Qualified Dividend Income (QDI), providing a tax benefit to many buyers (see "Hidden Risks Of Tax-Advantaged Preferred Stocks" for data regarding whether QDI preferreds are really advantageous).

eBay's EBAYL provides preferred stock investors with a rare opportunity to invest directly in a technology firm without exposure to common stock risk. EBAYL was purchased by its underwriters on February 22 and will begin retail trading shortly. Introducing an ETD into its capital stack is a new strategy for eBay, rarely seen among retailers (online or otherwise). ETDs are bonds and are recorded on the company's books as debt, rather than equity (as with preferred stocks). As debt, ETDs are generally seen as carrying less risk than the same company's preferred stock in the event of a bankruptcy. As bonds, the interest paid to shareholders by ETDs is generally cumulative and is taxed as ordinary income (no QDI opportunity here).

EBAYL is a large issue raising about $726 million after underwriter commissions. With double investment grade ratings, and the lower risk profile of an ETD, EBAYL should attract a lot of attention for the next several weeks. Retail buyers should remember, however, that the lower the coupon, the less likely a future redemption (Public Storage, for example, has never redeemed a preferred stock with a coupon below 6.125 percent). Even though the call date for EBAYL is March 1, 2021, it would not be unusual for shares to remain trading until their February 1, 2056 maturity date so perpetual ownership is a consideration here.

In Context: The U.S. Preferred Stock Marketplace

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

Continuing last year's trend, the average market price of call-protected, U.S.-traded preferred stocks has fallen this year, favoring buyers.

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

After having started 2016 at $24.59, buyers were paying an average of $24.29 per share at the end of February, down $0.30 so far this year.

Beyond ratings, many things affect the market prices of these securities such as the proximity to their call or maturity date, proximity to their next ex-dividend date, industry and/or overall health of the issuer (think upstream oil producers), perceived direction of interest rates, pending government regulatory or policy changes, cumulative versus non-cumulative dividends and tax treatment of dividend payments. So what we really need to look at is current yield, which calculates the average annual dividend yield per dollar invested (without considering re-invested dividend return or any future capital gain or loss). Current yield is a "bang-for-your-buck" measure of value that normalizes differences in coupon rate and price to give us a single, comparable metric.

As prices have come down, buyers do not need to invest as many dollars to earn the same return, so preferred stock yields are heading up. The current yield of all call-protected, U.S.-traded preferred stocks at the end of February was 8.043 percent (rated and unrated), up 0.328 percent from 7.715 percent at the beginning of the year.

For comparison, I have set the Yield column in the first table above to show the current yield of the four new February preferreds on February 29.

It is into this marketplace that February's new issues were introduced. Compared to the overall market, the four new February issues appear fairly miserly, offering lower coupons. But when comparing these issues to other recent introduction (see January 2016 IPO's) or other issues from the same companies (where there are some), the underwriters have concluded that today's buyers are willing to pay about $25 per share for these income securities from these issuers.

If the underwriters got it right, the market prices of these new securities should stay fairly close to $25 (their par value) for the next few weeks. As unique as it is, EBAYL will be the one to watch.

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.