Fixed Rate Preferred Stocks - Complete Review

|
Includes: BHR.PD, CETXP, DTLA.P, ESGRO, HOVNP, MAA.PI, MH.PA, MH.PC, MH.PD, MHLD, NM.PG, NM.PH, PCG, PCG.PG, PFF, 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 360 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: the 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 around $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

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 that the TNX has fallen below the 3% yield mark amid projections of slowing economic growth and weaker inflation. Despite the less dovish-than-expected Federal Reserve's guidance on its tightening cycle, released by the Fed on December, the treasury yields remain low. However, the fixed-income securities, as we can see in the second chart, continue to sink lower and lower, just before to end the year with a cheerful New Year's rally, giving some fresh optimism. As for the equity markets, stocks entered into a bear market and the S&P 500 recorded its worst December since 1931, capped off by a 9.2% plunge. Still, the investors may be happy with the days after Christmas and the 7.3% bounce back for the low just for a couple of days.

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

Now, I will separate these into two groups - those that pay a qualified dividend rate, and those 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.

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. Besides, as I mentioned above, PCG.PG also has its dividend 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 119%.

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 8 of the 15 preferreds have their distribution suspended. These are RHE-A, HOVNP, NM-H, NM-G, MHLD's preferred stocks (MH-A, MH-C, and MH-D) and CETXP.

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:

Source: Author's database

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 > 5.5%:

Source: Author's database

Take a closer look at the main group:

Source: Author's database

11. Ex-Dividend Dates for January 2019:

Which fixed rate preferred stocks are ex-dividend until the end of the month. 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 who practices the dividend capture strategy.

12. mREIT Fixed Rate for IRA Accounts:

Source: Author's database

13. A Look at Recent Redemptions:

There are 4 preferred stocks that have been called for redemption for the past month:

Source: Author's database

14. A Look at Recent IPOs:

Also, there are two new fixed-rate preferred stocks, issued for the past two months:

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

Top Losers:

Source: Author's database

Conclusion

This is what our small world of fixed-rate preferred stocks looks like at the start of 2019.

In this rising rate environment, fears of a trade war, and slowing global economy, it is normal for fixed income securities to get affected, and those who follow our monthly reviews know that all stocks are in a strong bear market. Also, there was the FOMC Funds Rate decision last month, which has not changed the sentiment and even deepened it. However, the last several days are good for all fixed-income securities, which seems to continue. Personally, I own a quite varied portfolio of preferred stocks, taking advantage of the lack of the big technical seller.

Note: This article was originally published on Jan. 2, 2019, 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.