New Preferred Stock IPOs, June 2018

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Includes: COWN, ESGR, FRC, QTS, RNR, SNV, TNP
by: Doug K. Le Du
Summary

Seven new preferred stocks were introduced during June, offering an average annual dividend of 6.9 percent.

There are currently 121 high quality preferred stocks selling for an average price of $25.09 per share (investment grade, cumulative dividends).

51 of these high quality issues are now selling below their $25 par value, offering an average current yield of 5.4 percent.

U.S.-traded preferred stocks are now returning an average current yield of 6.7 percent.

The upward pressure on interest rates that has been building for some time now continues to deliver benefits to preferred stock investors in the form of higher dividends and lower market prices. As the first half of 2018 wraps up, higher rates have provided an average price savings of about $0.50 per share to preferred stock buyers.

June’s new issues

June’s seven new preferred stocks are offering an average annual dividend (coupon) of 6.9 percent for the consideration of preferred stock investors.

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.

A special note regarding preferred stock trading symbols: Annoyingly, unlike common stock trading symbols, the format used by exchanges, brokers and other online quoting services for preferred stock symbols is not standardized. For example, the Series A preferred stock from Public Storage is “PSA-A” at TDAmeritrade, Google Finance and several others but this same security is “PSA.PR.A” at E*Trade. For a cross-reference table of how preferred stock symbols are denoted by sixteen popular brokers and other online quoting services, see “Preferred Stock Trading Symbol Cross-Reference Table.”

There are currently 121 high quality preferred stocks selling for an average price of $25.09 (June 29), offering an average current yield of 5.51 percent. And 51 of these high quality issues are selling below their $25 par value offering an average current yield of 5.37 percent. By high quality I mean preferreds offering the characteristics that most risk-averse preferred stock investors favor such as investment grade ratings and cumulative dividends.

There are now a total of 899 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

Buying new shares for wholesale

Note that ENSTF from Enstar Group Limited (ESGR), TSSKF from Tsakos Energy Navigation Limited (TNP) and QTTTP from QTS Realty Trust (QTS) are still trading on the wholesale Over-The-Counter exchange (as of June 29). These are temporary OTC trading symbols until these securities move to a big board exchange, at which time they will receive their permanent symbols.

But there is no need to wait; during a period of relatively high prices, individual investors, armed with a web browser and an online trading account, can often purchase newly introduced preferred stock shares at wholesale prices just like the big guys (see "Preferred Stock Buyers Change Tactics For Double-Digit Returns" for an explanation of how the OTC can be used to purchase shares for discounted prices during a period of high preferred stock prices).

Those who have been following this strategy of using the wholesale OTC exchange to buy newly introduced shares for less than $25 are more able to avoid a capital loss if prices drop (if they choose to sell).

Your broker will automatically update the trading symbols of any shares you purchase on the OTC. ENSTF will become ESGRP, TSSKF will become TNP-F and QTTTP will become QTS-B.

About the new issues

COWNL from Cowen, Inc. (COWN) is an Exchange-Traded Debt Securities, also known as a baby bond. Oddly, the NGS exchange assigned the same trading symbol to this new issue as that of Cowen’s most recently redeemed security so be careful here. ETDS’ are bonds recorded on the company’s books as debt (rather than as equity, as in the case of preferred stock). As debt, the obligation to pay the interest on these bonds is cumulative. As bonds, ETDS’ are often seen as having lower risk than the same company’s preferred stock shares. ETDS are very similar to preferred stocks and are often listed on brokerage statements as such. The company has three ETDS’ currently trading with COWNL being the second new income security issued within the last six months. How rising interest rates have benefited income investors over the last six months can be seen by the dividend rate paid by Cowen’s two most recent offerings – COWNZ from December 2017 offers 7.350 percent while last month’s COWNL pays 7.750 percent. Cowen is an asset management company, managing the investments of its clients throughout various subsidiaries since 1994.

FRC-I is offered by First Republic Bank (FRC) and is one of two June securities that come with double investment grade ratings (Baa3/BBB-). FRC-I is a traditional preferred stock paying 5.5 percent non-cumulative dividends. When judged on the risk-versus-reward scale, this security’s 5.5 percent coupon is fairly miserly when compared to several other recent offerings such as UNUMA (an ETDS that I mentioned last month, offering 6.25 percent and a Moody’s investment grade Baa3 rating), MetLife’s MET-E offered at 5.625 percent last month with Baa2/BBB ratings (also discussed in last month’s article) and RNREF discussed next. The bulk of the proceeds from FRC-I will likely be used to redeem eight million shares of FRC-E, originally issued in 2013 at 7.0 percent, generating a $3 million annual dividends savings to the bank.

RNR-F from RenaissanceRe Holdings (RNR) is the company’s third currently-trading preferred stock, offering 5.750 percent non-cumulative dividends and double investment grade ratings (Baa2/BBB). This security’s 5.750 percent is closer to market than FRC-I’s 5.5 percent coupon, but still lagging which probably explains why it has been trading below its $25 par almost every day since its introduction. Even with its strong ratings, the underwriters probably should have put RNR-F’s coupon at 6.0 percent. RNR is a $5 billion (market cap) insurance and reinsurance company headquartered in Bermuda and established in 1993.

SNV-D from Synovus Financial Corporation (SNV) is a Ba3/BB- rated traditional preferred stock offering non-cumulative dividends with a fixed-to-floating rate structure. With this structure, this security offers a fixed 6.300 percent coupon until its June 21, 2023 call date. At that time, the coupon varies based on the three-month LIBOR rate (currently 2.31781 percent) plus 3.352 percent. Synovus is using the proceeds from this issue to redeem all 5.2 million shares of its SNV-C preferred stock, generating a $1.787 million annual dividend savings. Synovus is a $6.5 billion regional bank, originally founded in 1888, still serving the southeastern United States.

ENSTF/ESGRP comes from Enstar Group Limited (ESGR), a direct competitor of RenaissanceRe although with nothing close to RNR’s ratings. Structurally, this security is similar to SNV-D from Synovus, offering a fixed 7.000 percent coupon paying non-cumulative dividends until its September 20, 2028 call date. At that time, the coupon varies based on the three-month LIBOR rate plus 4.015 percent. Enstar has a $4.5 billion market cap, operates internationally and is headquartered in Bermuda. The proceeds from this security are being used to pay down the company’s revolving credit and term loan obligations, converting debt into equity on its balance sheet.

TSSKF/TNP-F is a traditional preferred stock offered by Greek shipper Tsakos Energy Navigation Limited (TNP). This unrated security defines the high risk/high reward end of the scale for June’s offerings. Its cumulative dividend obligation is about the only thing that risk-averse income investors might find attractive. Cumulative dividends means that if the company misses a dividend payment to you, they still owe you the money (their obligation to pay you accumulates). TSSKF/TNP-F has a fixed-to-float rate structure, offering a fixed 9.5 percent until July 30, 2028 at which time the rate becomes variable, pegged to the three-month LIBOR plus 6.54 percent.

QTTTP/QTS-B from QTS Realty Trust (QTS) is a somewhat rare type of preferred stock in that it is an “optionally convertible” security, allowing the preferred stock shares to be converted to the issuer’s common stock shares as specified in the security’s prospectus. Convertible preferred stocks come in two flavors – mandatory convertible and optionally convertible. While mandatory convertible preferred stocks convert to the company’s common shares by the company on the security’s call date, optionally convertible preferred stock shares are convertible at the option of the shareholder. QTTTP/QTS-B is somewhat unique in that it is optionally convertible at the option of the shareholder until the security’s July 20, 2023 call date; on that date, the company gains the right to convert the shares. Oddly, while the prospectus allows QTS to convert the shares on or after July 20, 2023, it prohibits the company from ever redeeming the shares for cash. Prior to this security, the most recent optionally convertible preferred stock issued in the U.S. occurred in September 2016. This security also has a $100 par value. QTS is a $2.2 billion Real Estate Investment Trust and specializes in data centers.

Sources: Preferred stock data - CDx3 Notification Service database, PreferredStockInvesting.com. Prospectuses COWNL, FRC-I, RNR-F, SNV-D, ENSTF/ESGRP, TSSKF/TNP-F, QTTTP/QTS-B

Tax treatment

The tax treatment of the income you receive from income securities can be a bit confusing, but it really boils down to one question – Has the company already paid tax on the cash that is being used to pay you or not? If not, the IRS is going to collect the full tax from you; if so, you still have to pay tax, but at the special 15 percent rate.

Companies incorporated as REITs (QTTTP/QTS-B) are required to distribute at least 90 percent of their pre-tax profits to shareholders. Doing so in the form of non-voting preferred stock dividends is the most common method of complying and because these dividend payments are made from pre-tax dollars, dividends received from REITs are taxed as regular income (i.e. they do not qualify for the special 15 percent dividend tax rate).

Interest that a company pays to those loaning the company money is a business expense to the company (tax deductible), so the company does not pay tax on the interest payments it makes to its lenders (i.e. interest payments made to lenders are paid with pre-tax dollars). Since Exchange-Traded Debt Securities are debt (June’s COWNL), ETDS shareholders are on the hook for the taxes. Income received from ETDS’ is taxed as regular income.

Lastly, if a company pays your preferred stock dividends out of its after-tax profits, the dividend income you receive is taxed at the special 15 percent tax rate. Such dividends are referred to as “Qualified Dividend Income” or QDI. QDI preferred stocks are often seen as favorable for holding in a non-retirement account due to the favorable 15 percent tax treatment. Looking at the Status column in the above table, five of June’s new issues pay QDI dividends (FRC-I, RNR-F, SNV-D, ENSTF/ESGRP, TSSKF/TNP-F).

In Context: The U.S. preferred stock marketplace

U.S. preferred stock prices had been edging back up throughout the second quarter, until the Federal Open Market Committee raised the federal funds rate on June 13. Doing so put upward pressure on the dividends paid by newly introduced income securities (preferred stocks, bonds), treating today’s preferred stock buyers to a long overdue income boost.

Further, the rate bump put downward pressure on the prices of previously issued lower-payers, creating additional buying opportunities for income investors.

The following chart illustrates the effect of the Fed’s rate increases on the average market price of U.S.-traded preferred stocks over the last twelve months.

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, 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.

Moving down the risk scale, the next chart compares the average current yield realized by today’s preferred stock buyers when compared to the yield earned by those investing in the 10-year Treasury note or 2-year bank Certificates of Deposit. Note how the lower prices seen since January in the above chart have pushed up the current yield being earned by today’s preferred stock investors.

U.S.-traded preferred stocks are currently returning an average current yield of 6.7 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 2.8 percent and that of the 2-year bank CD has recovered nicely to 2.7 percent.

For comparison, I have set the Yield column in the first table above to show the current yield of the new June preferreds on June 29. It is into this marketplace that June’s new issues were introduced.

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.