For those of you unfamiliar with my preferred investment philosophy, my article "The Basics Underlying Investments Viewed Through the Eyes Of A Preferred Investor" will explain how and why I became a preferred investor. More important, it will provide you the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process.
When considering the acquisition of Chesapeake Lodging Trust (NYSE:CHSP) preferred shares, 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. Below is a snapshot of the page you'll get if you enter CHSP into the ticker symbol search box:
A quick review informs us that CHSP is a lodging REIT that owns and operates upper-upscale hotel properties in urban settings. It IPO'd with a market value of $1.1 billion, making it a mid-size company.
Let's click on Find Related Securities to examine any preferreds this company has to offer:
Here we learn that CHSP offers one preferred CHSP-A, initially offered at 7.75%.
Now let's click on CHSP-A. 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 most interests me:
- I like that this preferred is cumulative, meaning in an event that payments are suspended, they accumulate and are owed to 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 there will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds.
- These shares are callable on 7/17/17 at $25.00 plus any accrued interest owed.
- It pays a dividend of $1.9375 per share per year, or 0.484375 per quarter, to be paid 1/15, 4/15, 7/15, & 10/15 of each year.
- At the time of its IPO, 7/12/12, these shares were unrated by Moody's and S&P, which really doesn't concern me but might concern a more conservative investor.
- Dividends are not eligible for the preferential income tax rate of 15% or 20%. You should be aware of how these tax ramifications will affect your investment bottom line.
- As usual, upon liquidation, preferreds 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 to 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 it's 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 shareholders' interests 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 websites to get an abbreviated, yet broad-based, view of the particular company I'm considering making an investment in. The following chart is from my IB platform. Sorry - Yahoo, for whatever reason, failed to go back far enough.
Above is a screenshot of CHSP's Five-year chart. As far as I'm concerned, this is the picture of a company that trended higher until 1/20/15 and has trended down until last month. Yet it ended priced significantly higher than at the beginning of the period. On 1/9/12 it traded at $16.09, and its currently priced at $25.63. That's an impressive rise of $9.54. Better yet, during that time, according to Dividend Investor.com, it consistently increased its common dividend distribution.
Although near the bottom of the chart, not bad in relation to the S&P 500 - basically nothing to write home about.
Below, I have cued finviz to open to the financials of CHSP.
Above is a screenshot taken from a Finviz view of CHSP's present financial highlights. The company's current market value is $1.56 billion. It earned $69.00 million on sales of $620.80 million. And year to date, it's up 9.27%. Its short- and long-term debt/equity is a low 0.62.
Now let's see how its preferred performed, as illustrated by the following MarketWatch chart:
It appears it has performed well along with its common sibling. And as far as I'm concerned, holding its preferred is a safe investment. Now let's determine if a buy at this time and at this price is a wise decision.
At $25.63, with a yearly dividend of 1.9375, your effective yield would be:
- 1.9375/25.63 = 7.56%
- If called promptly when callable 7/17/17 you would lose .63/share; however, you would gain at least two payments of .484375 or .97, meaning you cannot lose as far as an immediate call is concerned.
- On the bright side, you will collect a safe and effective yield of 7.56% until your shares are called.
It's your money and your decision to make.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.