JPMorgan Chase: 6.00% From This Preferred Stock IPO

Summary

• Overview of JPMorgan Chase's new preferred stock - JPM-C.
• A brief look at the company.
• Where in the context of all securities, issued by JPMorgan Chase, does JPM-C stands?
• Comparison with the sector.
• Comparison with the all preferred stocks, issued by a bank.
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Introduction

In this article, we want to shed light on a new preferred stock issued by JPMorgan Chase & Co. (NYSE:JPM). An interesting fact is that the company use this symbol, as it was the ticker symbol of an old issue that was redeemed on April 2, 2015.

_{Source: QuantumOnline.com}

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B2 Filing by JPMorgan Chase & Co - the prospectus.

_{Source: SEC.gov}

For a total of 74M shares issued, the total gross proceeds to the company are $1.9B. You can find some relevant information about the new preferred stock in the table below:

Source: Author's spreadsheet

JPMorgan Chase & Co. 6.00% Non-Cumulative Preferred Stock, Series EE (NYSE: JPM-C) pays a qualified fixed dividend at a rate of 6.00% and have a par value of $25. The new preferred stock is expected to be rated a 'BBB-' from Standard & Poor's and is callable as of 03/21/2024. Currently, the new issue trades above its par value at a price of $25.62 and has a 5.85% Current Yield and a 5.45% Yield-to-Call.

Here is how the stock's YTC curve looks like right now:

_{Source: Author's spreadsheet}

The Company

JPMorgan Chase & Co. (JPMorgan Chase), incorporated on October 28, 1968, is a financial holding company. The Company is engaged in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, and asset management. JPMorgan Chase's activities are organized into four business segments, as well as a Corporate segment. The Company's segments include Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management. Its principal bank subsidiaries include JPMorgan Chase Bank, National Association (JPMorgan Chase Bank, N.A.), a national banking association, and Chase Bank USA, National Association (Chase Bank USA, N.A.), a national banking association that is the Company's credit card-issuing bank. JPMorgan Chase's principal nonbank subsidiary is J.P. Morgan Securities LLC (JPMorgan Securities), the United States investment banking firm. The bank and nonbank subsidiaries of JPMorgan Chase operate nationally, as well as through overseas branches and subsidiaries, representative offices and subsidiary foreign banks. The Company's principal operating subsidiary in the United Kingdom is J.P. Morgan Securities plc, a subsidiary of JPMorgan Chase Bank, N.A.

_{Source: Reuters.com | JP Morgan Chase & Co}

As it is the one of the most famous and the biggest US Bank, there is no need for a much in-depth presentation, so let's move further with the market opinion for the common stock, JPM:

_{Source: Tradingview.com}

The yearly dividend paid by JPM has increased since the Great Recession from $0.20 in 2010 to $2.48 in 2017, which is an 1140% increase. With a market price of $104.35, the current yield of JPM is at 2.37%. As an absolute value, this means $8.3B yearly dividend expenses for the common.

In addition, the market capitalization of the company is around $353B, which makes JPMorgan Chase the largest 'Money Center Bank'.

Capital Structure

Below, you can see a snapshot of JPMorgan Chase & Co.'s capital structure as of its Quarterly Report in September 2018. You can also see how the capital structure evolved historically.

_{Source: Morningstar.com | Company's Balance Sheet}

As of Q3 2018, JPM had a total debt of $334.76B ranking senior to the newly issued preferred stock. The new Series EE preferred stock rank junior to all outstanding debt and equal to the other outstanding preferred stocks, which total $27.76B.

The JPMorgan Chase Family

The company has 7 more outstanding preferred stocks, listed on the NYSE:

• JPMorgan Chase & Co. 6.70% Dep Shares Non-Cumulative Preferred Stock, Series T (NYSE: JPM-B*)
• JPMorgan Chase & Co. 6.30% Dep Shares Non-Cumulative Preferred Stock Series W (NYSE: JPM-E)
• JPMorgan Chase & Co. 6.15% Dep Shares Non-Cumulative Preferred Stock Series BB (NYSE: JPM-H)
• JPMorgan Chase & Co. 6.125% Dep Shares Non-Cumulative Preferred Stock Series Y (NYSE: JPM-F)
• JPMorgan Chase & Co. 6.10% Dep Shares Non-Cumulative Preferred Stock Series AA (NYSE: JPM-G)
• JPMorgan Chase & Co. 5.75% Dep Shares Non-Cumulative Preferred Stock Series DD (NYSE: JPM-D)
• JPMorgan Chase & Co. 5.45% Dep Shares Non-Cumulative Preferred Stock, Series P (NYSE: JPM-A)

_{Source: Author's database}

As the company announced that it will redeem on March 1, 2019, all of its outstanding shares of its 6.70% Non-cumulative Preferred Stock (JPM-B), we will compare the newly issued Series EE Preferred Stock with the rest of JPM's preferred stocks, and we can see that it is fairly priced with its closest "brother", the previously issued JPM-D and it is better than the older JPM-G, JPM-F, and JPM-H. However, this is at the expense of a longer period of time to its call date. A better idea of the peer group yields can be found in the following bubble charts:

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

_{Source: Author's database}

By Yield-to-Call and Current Yield

_{Source: Author's database}

Furthermore, there are a plethora of corporate bonds issued by the company and the picture below presents only a tiny part of it:

_{Source: FINRA}

For my comparison, I choose a fixed-rate bond that matures almost the same as the call date of JPM-C, JPM4345217.

_{Source: FINRA | JPM4345217}

JPM4345217, as it is the FINRA ticker, is rated an 'A-', has a maturity date of 03/22/2024, and is yielding at 3.5%. This should be compared to the 5.45% Yield-to-Call of JPM-C, but when making that comparison, do remember that JPM-C's YTC is the maximum you could realize if you hold the preferred stock until 2024. This result is a yield spread of around 2% between the two securities, which can be explained by the higher rank in the capital structure and the higher credit rating of the Bond.

Sector Comparison

The chart below contains all preferred stocks in the "Money Center Banks" sector (according to Finviz.com) that pay a fixed dividend rate and has a par value of $25. It is important to take note that all of these preferred stocks are eligible for the 15% federal tax rate.

The Yield Curve, presented by all non-callable issues that trade above its par value:

_{Source: Author's database}

All preferred stocks by their Yield-to-Call and Current Yield:

_{Source: Author's database}

Take a closer look at the main group:

_{Source: Author's database}

The Banking Preferreds

The chart below contains all preferred stocks issued by a bank with a par value of $25 that have qualified fixed dividend rate.

The Yield Curve, presented by all non-callable issues that trade above its par value:

_{Source: Author's database}

All preferred stocks with a positive Yield-to-Call by their Yield-to-Call and Current Yield:

_{Source: Author's database}

Again, the main group:

_{Source: Author's database}

All 'BBB-' Preferred Stocks

The last chart contains all preferred stocks that pay a fixed dividend rate, have a par value of $25, a 'BBB-' Standard & Poor's rating and a positive YTC.

_{Source: Author's database}

A closer look:

_{Source: Author's database}

Redemption Following a Capital Treatment Event

At any time within 90 days after a capital treatment event, and at the option of our board of directors or any duly authorized committee of our board of directors, we may provide notice of our intent to redeem the Preferred Stock in accordance with the procedures described below, and we may subsequently redeem, out of assets legally available therefore, the Preferred Stock in whole, but not in part, at a redemption price equal to $10,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends on the shares of the Preferred Stock called for redemption up to the redemption date. Subject to irrevocably setting aside or depositing funds necessary for redemption, dividends will cease to accrue on such shares on the redemption date, without accumulation of undeclared dividends.

For purposes of the above, "capital treatment event" means the good faith determination by us that, as a result of any:

• amendment to, or change or any announced prospective change in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective after the initial issuance of any shares of the Preferred Stock;
• proposed change in those laws or regulations that is announced or becomes effective after the initial issuance of any shares of the Preferred Stock; or
• official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced or becomes effective after the initial issuance of any shares of Preferred Stock,

there is more than an insubstantial risk that we will not be entitled to treat an amount equal to the full liquidation amount of all shares of Preferred Stock then outstanding as "additional Tier 1 capital" (or its equivalent) for purposes of the capital adequacy guidelines or regulations of the appropriate federal banking agency, as then in effect and applicable, for as long as any share of Preferred Stock is outstanding. Redemption of the Preferred Stock is subject to our receipt of any required prior approvals from the Federal Reserve Board or any other regulatory authority.

_{Source: 424B2 Filing by JP Morgan Chase & Co}

Use of Proceeds

Unless otherwise described in the applicable prospectus supplement, we will use the net proceeds we receive from the sale of the securities offered by this prospectus and the applicable prospectus supplement for general corporate purposes. General corporate purposes may include the repayment of debt, investments in or extensions of credit to our subsidiaries, redemption of our securities or the financing of possible acquisitions or business expansion. We may invest the net proceeds temporarily or apply them to repay debt until we are ready to use them for their stated purpose.

_{Source: 424B2 Filing by JP Morgan Chase & Co}

S&P preferred stock index

With the current market capitalization of the new issue of around $1.9B, it is a potential addition to the S&P US Preferred Stock iShares Index. If the average monthly volume of JPM-C after its first six months on the NYSE is more than 250,000, it would be eligible for inclusion in the S&P U.S. Preferred Stock Index. With fewer than six months of trading history, issues are evaluated over the available period and might be included if available trading history infers the issue will satisfy this requirement.

However, it must be noted that the main benchmark, PFF, which is the ETF that seeks to track the investment results of this Index, is in progress of changing its investment objective. The fund is expected to change the underlying index, passing through a Transition index ("ICE Exchange-Listed Preferred & Hybrid Securities Transition Index") during the period from February 1, 2019, to October 31, 2019, and after that will track the "ICE Exchange-Listed Preferred & Hybrid Securities Index". Since the requirements for addition of the New Index are much likely the same as the old one (with the difference that the New Index will also include notes), with a high probability JPM-C will be included to the PFF holdings.

Conclusion

This is an informational article about the new preferred stock, JPM-C. With this kind of articles, we want to keep you in touch with all new preferred stock and baby bonds IPOs.

Analyst’s 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.

Comments

[jamesrattenborg]

When a preferred stock is called does it sell at par vale or a value determined by the bank? If the fed lowers rates to zero to prop up the stocks, do the banks call all preferreds?

[Gridbird]

@jamesrattenborg, if company redeems preferred it will pay at par price (generally $25 for most issues) plus accrued interest. Most will redeem at payment date of divi. Generally, most preferreds will be redeemed if they can reissue at 50-75 basis points lower than current preferred. There are transaction costs in issuing and redeeming preferreds so that is why it takes 50-75 basis points. When you start seeing new issues of similiar quality coming to market at that amount lower its time to get nervous if preferred is past redemption date. Though others can be redeemed for other reasons and not reissued though.

[user1969]

I try to sell them a bit early James and lock in any profits available.
And just find a new IPO or some other preferred to move the money into.

There is a downside to getting called. Usually your money remains locked up for up to a month while the call get resolved.
You don't get your money for the shares the day the call happens.
If you look at JPM-B which was called earlier this year.
When the call happens it gets renamed to JPM-B.cl in your account and will sit in your account like that for a while until the final call transaction happens.
And you cannot trade the JPM-B.cl shares since they are called and locked.

[jamesrattenborg]

Thank you user 1969.

[Doggywag]

I prefer (greatly) the PSA preferreds. The storage REIT PSA has almost no bank debt (and very low overall debt), and the company has stated that it would still break even at only a 30% occupancy rate (occupancy is in the 90 %s). Most of the PSA preferreds are still trading well below the $25 par value (they've risen somewhat from the incredible bargains they were at the end of 2018). Yield might be a little lower than the JPM preferreds but you get greater safety and that discount.

[tennvol_30736]

Doggy--Although its been awhile since I've looked at PSA, but probably they remain the strongest income credit in the reit space with almost no debt. I'm waiting for an upward move in interest rates before I get back in. Preferred share prices will take a licking when, not if, that happens.

[Gridbird]

@tennvol_30736, That is the million dollar question. One takes their chances. VIX is low, Fed waved the white flag, German 10 yr Bund flirting with zero again. World economy at present is slowing down.
The bargains were definitely in December and that was some fun profitable preferred trading for me. I like that volatility.

[tennvol_30736]

Someone needs to explain how countries like Germany can have zero to negative interest rates and build an economy, explain the rationale. Life is full of surprises and wouldn't be surprised inflation and interest rates rise significantly. It is only a matter of time.

[user1969]

Good to see banks still issuing preferred stock.
This and CFG-D

[William Nuke]

Why NON-cumulative?? I only have cumulative preferred stocks in my portfolio. Am I missing something?

[Gridbird]

@William Nuke, Sorry but you will be not playing in bank preferred sandbox if you need cumulative. Fed regulations for capital purposes have required it for years now. Only 3 tradeable cumulative QDI bank preferreds on the market I am aware of, all grandfathered...MTB-P, MTB-C (they are identical sisters) and FIISO. I own all 3. I have 300 hundred shares of FIISO, but dont put much effort into buying it...Only 23 shares have traded in over a year.

[DivvySam]

Another Great Article AT...Thanks...

Not thrilled with the BBB- rating...Geez WFC's ...PW and ...PY were originally rated a little better at BBB.

But I like JPM so I'm waiting for a good entrance of either or both JPM-PC and JPM-PD, as I feel they are a little overpriced at this moment...

[karibruce]

Dear ten, it is my understanding that JPM cannot stop paying dividend on the preferred shares unless they stop paying dividend on the common shares. This rule protects the dividend on preferred shares

[Gridbird]

@karibruce, it is a very pessimestic view of the issue that one could say on any issue. A more reasoned worry would be capital loss impairment from perpetual yield duration risk from any long end yield curve movement than non payment.

[tennvol_30736]

The important issue one should raise about this preferred is that its non-cumulative. The banks is raising capital to meet what I think is a Tier 1 requirement from the Fed.. There is a lot of shaky debt in credit markets and it is not outside the realm of possibility the dividend at some point will be omitted. If the bank doesn't pay the dividend, the shares will lose most of its vaue.

[Landlord Investor]

During the GFC neither JPM nor lesser major banks like BAC or C suspended their non-cum preferreds. So while it's not outside the realm of possibility, it would take a financial crisis bigger than the GFC for JPM to suspend.

[tennvol_30736]

Not likely JPM would not pay the preferred with emphasis on "not likely". These are troubled times, troubling signs.

[tennvol_30736]

I see that you omitted Wachovia.

[ChuckXX]

It is somewhat amazing at just how many preferreds and bonds this company can issue.

[Chuck/Charlie]

Chuck XX I agree. JPM is a true Behemoth...... Just wait in 20 more years when they are bigger than most countries in the world! Oops , 20 years is now.....LOL... Long JPM

[rbow]

Best time to buy a new preferred is typically the first or second day. I did and up 2%. Wouldn't buy at current price (<5.5% YTC), any higher and I'll cash out.

[jimbob1101]

Great article and insights!

[Centerfield12]

Always curious how such a large money center bank like JPM continues to receive BBB- ratings (one step away from junk status)? Is it the overall debt levels? Their exposure to any derivatives?

[Landlord Investor]

JPM unsecured sr debt is rated A-. Standard practice is jr debt is rated one notch below that and preferreds another notch lower. That should put JPM at BBB. Not sure why their preferreds get another notch lower at BBB-.

[Timheyne]

Tried to buy it at 25, no luck though. I expect a pullback soon.

[user1969]

Was available for 25.10 - 25.15 if when it started trading if your broker allows gray market trading.

[motto5448]

JPM the king of the banking sector preferreds.