Fixed Rate Preferred Stocks - Complete Review

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Includes: AFSI, BCS.D, BHR.PD, DTLA.P, FRC.PE, GS.PB, GSL.PB, HOVNP, MAA.PI, MHLD, NM.PG, NM.PH, PCG, PFF, PSA.PY, RBS.PS, RHE.PA, SPG.PJ
by: Arbitrage Trader
Summary

I review the most popular fixed-income securities, the fixed-rate preferred stocks.

All the preferred stocks are sorted in categories.

What has changed over the last month?

In this article, I'll review the most popular fixed-income securities, the fixed-rate preferred stocks, sorted into several categories. There are 361 issues in our database that trade on primary exchanges, excluding the convertible preferred stocks, half of which are part of the biggest ETF for fixed-income securities: iShares U.S. Preferred Stock ETF (PFF). As we can see in the chart below, half of the PFF's market capitalization consists of fixed-rate preferred stocks, which also corresponds to almost 60% of the fund's holdings. This means that we are talking of over $7B in dollar value.

Source: Author's spreadsheet

First, let's take a look at the main indicators that we follow and their behavior during the last month.

TNX - CBOE 10-Year Treasury Note Yield Index ($TNX)

Source: Tradingview.com

iShares U.S. Preferred Stock ETF (PFF)

Source: Tradingview.com

And a more global view of PFF:

Source: Tradingview.com

SPDR S&P 500 ETF (SPY)

Source: Tradingview.com

The most essential thing for fixed-income investors for the past month is TNX is set firmly above the 3% yield mark and is trading close to its 7-year high, caused by the Fed, which increased its Funds Rate by another 0.25% during the September meeting and its projection for another 0.25% rate hike in December. Despite the apparent dovish speech last Wednesday (November 28), during which the Fed Chair Powell announced that central bank's policy rate is now "just below" estimates of a level that neither brakes nor boosts a healthy U.S. economy, comments that many investors read as signaling the Fed's three-year tightening cycle is drawing to a close, the fixed-income securities, as we can see in the second chart, continue to sink lower and lower. As for the equity markets, the most important thing is definitely the agreement between the U.S. and China to hold off on additional tariffs on each other's goods at the start of the new year to allow for talks to continue for 90 days, which materializes in a strong market boost.

The Review

1. Redemption Risk by Years-to-Call and Yield-to-Call:

The lower the stock, the bigger the call risk. Be careful not to get surprised in these ones if you are tempted by the higher yield.

1.1 Long Time No Call

Source: Author's database

1.2 Short Time No Call

Source: Author's database

2. Stocks That Are Below Par (Stripped Price) and Have a Current Yield of Between 5% and 8%:

Source: Author's database

It should be noted that PG&E (PCG) suspended the dividend on its preferred stocks beginning Jan. 31, 2018. Yet their dividends are cumulative, and the reason for their suspension at this time is not the solvency of the company. At the end of the day, a suspended dividend means that we are not getting our money on time, and the time value of money does matter to us.

Take a look at the investment grade only: Source: Author's database

With the continuing sell-off, the Current Yield of the investment grade preferred stocks has reached the 6% yield mark, while as a comparison, for the start of August they were yielding a little above 5%.

Now, I will separate these into two groups - these that pay a qualified dividend rate, and these that pay a not qualified dividend rate.

Qualified:

Source: Author's database

Not Qualified:

Source: Author's database

3. Current Yield < 5% (Try to Avoid These):

Source: Author's database

An interesting fact about the preferred stocks in this group is that they are issued in the 1940s and 1950s, which makes them older than many of us.

With the sell-off of all SCE's preferred stocks, caused by the intensifying California wildfires and EIX plunging 35% for a couple of days, they are no more part of this low yielders group.

4. Current Yield Between 8% and 10%:

Source: Author's database

None of these preferred stocks bear an investment grade rating. Although, they have to bring extra risk because there is no free lunch. Furthermore, please note that Brookfield DTLA Fund Office Trust Investor 7.625% Series A Cumulative Redeemable Preferred Stock (NYSE: DTLA.P) has not paid any distribution since November 1, 2008. Despite the fact that there is a solid amount of accumulated dividend, it is still suspended.

5. Current Yield > 10%:

Source: Author's database

For a better look at the rest of the preferred stocks in this group, let's remove RHE-A from the chart, as its current yield is above 110%.

Source: Author's database

Overall, this is a highly speculative group and the preferred stocks involved here come from companies that are currently in serious problems. The curious thing, in this case, is that only 4 of the 15 preferreds have their distribution suspended. These are RHE-A, HOVNP, NM-H, and NM-G.

6. Price > Par, Sorted by Yield-to-Worst and Years-to-Call:

Source: Author's database

Now, in the next few charts, I'll examine how the yield curve looks.

7. The Yield Curve for Rated Ones:

Source: Author's database

This is the hypothetical five-year yield curve of fixed rate preferred stocks. For a better view, I have excluded MAA-I and SPG-J.

8. The Yield Curve Investment Grade:

Source: Author's database

Qualified:

Source: Author's database

Not Qualified:

There is only one stock in this group, PSA-Y:

Source: Author's spreadsheet

9. The Term Preferred Stocks:

By Years-to-Maturity and Yield-to-Maturity

Source: Author's database

By Yield-to-Call and Yield-to-Call

Source: Author's database

Here is the full list:

Source: Author's database

10. Let's Try to Find a Qualified "Investment Grade" Rated Preferred Stock With a Current Yield > 6% and YTC > 4.5%:

Source: Author's database

Take a closer look at the main group:

Source: Author's database

11. Ex-Dividend Dates for December 2018:

Which fixed rate preferred stocks are ex-dividend until the end of the year. The date given is predicted on the base of the previous ones and may vary by a few days.

Source: Author's database

The ex-dividend dates are very useful for every fixed-income investor that practice the dividend capture strategy.

12. mREIT Fixed Rate for IRA Accounts:

Source: Author's database

13. A Look at Recent Redemptions:

There are 3 preferred stocks that have been called for redemption for December:

Barclays Bank plc 8.125% Non-Cumulative Callable Dollar Preference Shares Series 5 ADR (NYSE: BCS-D)

Source: Author's spreadsheet

First Republic Bank 7.00% Depositary Shares Non-Cumulative Series E Preferred Stock (NYSE: FRC-E)

Source: Author's spreadsheet

and...

Royal Bank of Scotland 6.60% Non-cumulative Dollar Preference Shares Series S ADR (NYSE: RBS-S)

Source: Author's spreadsheet

14. A Look at Recent IPOs:

Also, there are two new fixed-rate preferred stocks, issued in November:

Braemar Hotels & Resorts 8.25% Series D Cumulative Preferred Stock (NYSE: BHR-D)

Source: Author's spreadsheet

and...

Enstar Group 7.00% Depositary Shares Perpetual Non-Cumulative Preference Shares Series E (NASDAQ: ESGRO)

Source: Author's spreadsheet

15. Top Movers

Here is the general idea of how the fixed-rate preferred stocks moved over the last month. On the abscissa, the movement is given in absolute value.

Source: Author's database

Top Gainers:

Source: Author's database

Nothing essential on the upside.

Top Losers:

Source: Author's database

The mass of the preferred stocks are down for another month, despite all positive news, and it seems almost discouraging for the fixed-income investors.

A big part of these preferred stocks owes their fall more to the increased credit risk of their parent company:

- the MHLD preferreds have lost almost half of their market capitalization since the company's quarterly report and the lack of declaration of their dividend.

- the AFSI preferred shareholders suffer significant loss as the company become private and because of the increased risk of abuse such as unreasonable suspension of the preferred stock dividends.

- GSL-B have retraced its previous gaines, caused by merger news after the initial optimism has evaporated.

- as I have already mentioned above, the SCE's low yielding preferred stocks owe their fall to the raging wildfires in California.

Conclusion

This is what our small world of fixed-rate preferred stocks looks like before the end of 2018.

Note: This article was originally published on Dec. 3, 2018, and some figures and charts may not be entirely up to date.

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.