This article is being written to introduce 5 companies with 8 non-cumulative preferred stocks that are currently among the highest yields in this class of preferred stocks. It is my experience that most analysts recommend against investing in non-cumulative issues. After all, if you have a choice between a cumulative and non-cumulative issues with the same or similar characteristics of price, safety, and ability to pay the dividend, why take the extra risk with the non-cumulative preferred? Before I try to answer that question, here is how I define what a non-cumulative preferred stock is.
A non-cumulative preferred stock is a type of preferred stock that allows the issuing company to skip or omit paying the dividends. This cancels the company's obligation to eventually pay those dividends and means that shareholders do not have a claim on any of the dividends that were not paid out. Keep in mind that they must first stop paying the common stock dividend before they stop paying the preferred dividend.
That definition doesn’t sound too encouraging for shareholders, but what is the likelihood of a company skipping payments and then continuing on in business? I reviewed the records of companies with non-cumulative preferred stocks that have suspended dividends on QuantumOnline over the last 10 years.
# ISSUES SUSPENDED
OPEN / CLOSED
W Holding Co
First National Bancshares
It appears that of the 5 companies that have skipped or stopped their dividends, 3 remain in business and the other 2 have closed. I see no indication that the 3 have ever resumed the dividend on the preferred stock.
Checking the database at “I Prefer Income”, I found 152 non-cumulative preferred stocks from 61 companies. The breakdown of these companies include 37 banks, 13 insurance companies, 8 financial companies, 2 closed-end funds and 1 rail company. I am not an expert on this, but I understand that there is a reason why these financially related companies issue non-cumulative vs. cumulative preferred stocks. It has something to do with their capital ratios and reduction of their risk profile (note: I welcome comments from readers on this subject).
I also found that of the 152 non-cumulative preferred stocks that are currently active, 84 are rated investment grade. Compare that to the 286 cumulative preferreds where 75 are rated investment grade. That means that 55% of non-cumulative preferred stocks are investment grade versus only 26% of cumulative preferred stocks that are investment grade. In general, more than twice as many non-cumulative preferreds are investment grade preferred stocks than cumulative preferred stocks.
I will now answer my initial question of “if you have a choice between a cumulative and non-cumulative preferred stock with the same or similar characteristics of price, safety, and ability to pay the dividend and yield, why take the extra risk with the non-cumulative preferred?” My answer is that if given the choice between the 2, I would invest in the cumulative issue because during a down market, I try to hold onto my investments for the income and I don’t need any nagging doubts like holding non-cumulative preferreds to upset my state of mind.
If you take a look at this logically, however, non-cumulative preferreds are generally stronger than cumulative preferreds, and even though they can skip the dividends with no liability, the odds are they won’t. And if that is cause for concern, what about the common stocks you own? They can also cut or stop their dividends with no problems of liability. In the end, it is probably not an issue as long as you invest in companies with strong metrics.
Introducing the highest yielding non-cumulative preferred stocks in the marketplace
I track all preferred stocks, including both cumulative and non-cumulative issues through my database and there are currently 286 cumulative preferred stocks with an average 7.2% yield and 152 non-cumulative preferred stocks with an average yield of 6.47% yield. In this article, I will highlight 8 non-cumulative preferreds from 5 parent companies. These 8 are currently among the highest yielding non-cum preferred stocks in the market with prices below $25.29. I will provide an overall review of these companies by using the Where’s the Metrics analysis system that uses 5 main metrics to help determine the overall financial health of the parent company and their ability to pay a reliable and sustainable distribution. If you have not read about the Where’s the Metrics analysis system, please click on this link to read about it.
The purpose of this general review is not to give recommendations; but rather, to show areas of strengths and weaknesses from each company. From this review, you will have a better understanding of the company and able to do further research if warranted.
The 5 metrics that are used to analyze these securities are listed below:
- Payout ratios
- Debt Ratios
- Credit Ratings
- Dividend Metrics
The table below contains the 5 parent companies located in the gray rows. Directly under the parent company are their 8 non-cumulative preferred stocks. There are 25 columns of information that include general info and financial metrics that will be used to obtain a better idea of each of the company’s overall financial health and ability to pay a reliable and sustainable distribution. Each of the 5 areas of metrics are displayed below within the blue rectangles.
The table contains 8 non-cumulative preferred stocks with an average yield of 7.4%. Three of the companies are banks, one is an insurance company and one is a financial company. Coupon rates range from 6.38% to 7.5%. Prices range from $21.26 to a high of $25.29. Yields range from 6.5% to 8.5%. One thing to note is that 7 out of 8 issues offer tax advantaged status.
When doing a general review, I am comparing the metrics of the parent company in all areas except credit ratings. My goal is to get a better idea of the overall financial health of the parent because they are responsible for maintaining and paying the distributions on the preferred stocks.
Earnings: I have placed a blue rectangle around each of 5 areas for review. The first area for review is earnings. The 2 columns display 5 years and also 5 quarters of GAAP earnings from the parent company. There is only one company, First BanCorp (FBP), that has a perfect record of 5 years and 5 quarters of profits. All companies have good earnings records except for Compass Diversified Holdings LLC (CODI). It has a record of 3 years of profits and only 1 quarter of profits.
One thing to note is that these 2 “profit and loss” columns only show GAAP earnings (EPS). All companies report GAAP earnings, but only CODI also reports non-GAAP earnings of “cash available for distribution” (CAD). The following table shows both EPS & CAD earnings taken from the I Prefer Income database. The top row shows EPS and the 2nd row shows CAD earnings for years and quarters.
When you compare the two, you can see that CAD earnings are substantially better than EPS earnings for most of the periods in the table.
GAAP and NON-GAAP Earnings
Compass Diversified Holdings LLC (CODI)
Payout ratios: The 2nd area for review is payout ratios. This includes “stock dividend payout ratio”, “preferred stock dividend ratio”, and “preferred dividends to operating cash flow payout ratio”. A score under 1 means that the company is earning enough in earnings to cover the dividend. A score over 1 means that they are not covering the dividend.
All companies in the stock dividend payout column show scores substantially under 1, except for CODI. They come in with a score of .94. It is below 1, but not much.
The second payout ratio we use is the “preferred stock dividend payout ratio”. This will tell us if the company is able to cover their preferred stock dividend. A score of under 1 shows they are covering the dividend; however, we really want the score to be much lower. You will note that all 5 of the companies have scores substantially below 1.
The third payout ratio is the “dividend to operating cash flow payout ratio”. This shows if the distributions are covered by operating cash flow. They are all substantially below 1.
Debt: The 3rd rectangle shows 2 debt ratios, including “debt-to-EBITDA” and “debt-to-equity”. Every industry is different, but in general, we want to see these debt ratios to be as low as possible and best to see debt-to-equity scores under 4 or 5. All companies in the table have good debt ratios, except CODI. Its debt-to-EBITDA ratio is much higher than the other companies.
Credit Ratings: The credit ratings for all of the non-cumulative preferreds located in the 4th rectangle are either non-existing or below investment grade.
Dividend metrics: The 5th area contains several dividend related fields of information that are important. The first thing to note is that all parent companies pay a common stock dividend. Remember that the company cannot stop or delay the preferred stock dividends unless the common dividend is stopped first.
Other dividend metrics compare the 10-year median yield with the current yield to see if the spread is wide enough to provide insight into current market sentiment. All current yields are similar to the median yield except for FBP. The current yield for the parent is substantially lower than the median. That could mean that the market has bid up the price (and lowered the yield) compared to the median. That may be a positive reflection on the company.
Next is the 3-year average yearly dividend growth rate. This shows that 3 of the 5 have a positive dividend growth. I should point out that FBP recently added a dividend in December of 2018 after last paying it in 2009. CODI remains stable.
In summary, the review of the 5 companies and 8 non-cumulative preferred stocks shows generally positive results, although CODI has mixed results. I will now review each company individually.
Review of each parent company
Popular, Inc. (BPOP) is a Puerto Rican bank with 172 branches, including 67 owned and 105 leased premises in Puerto Rico; 51 branches comprising 5 owned and 46 leased premises in New York, New Jersey, and Florida; and 619 ATMs in Puerto Rico, 22 ATMs in Virgin Islands, and 115 ATMs in the United States mainland. BPOP has one issue (OTCPK:BPOPO) that meets the criteria for this article. It is priced at $24.46 and a yield of 6.5%. 4 of the 5 metric areas look in excellent shape. The credit rating is an area that investors might be concerned with. The rating is below investment grade. I am happy to see that they survived the huge hurricane in good shape.
Here is Popular, Inc.’s GAAP earnings' record over the last 5 years and 5 quarters.
Compass Diversified Holdings LLC is a business that owns, acquires and partners with other businesses. Their strategy and philosophy is: “we look to acquire companies that we could own forever and that exhibit a clear “reason to exist.”" Sounds like something Warren Buffett would say. Of the 5 companies in the table, CODI’s preferred stock (NYSE:CODI.PA) has the lowest price at $21.26 and the highest yield at 8.5%. They have the worst GAAP earnings record of the 5. However, they also report non-GAAP earnings in CAD. Look at the table below to see the difference between EPS and CAD. Even though their payout scores are based on CAD and are very acceptable, their dividend payout score is the worst of the 5 at .92.
The ratio that is more important than the dividend ratio is the “preferred dividend payout ratio”. It is an excellent score of .07 and shows that the preferred dividend is very well covered.
The debt ratios scores are mixed. The debt-to-EBITDA is higher than it should be, but the debt-to-equity comes in with a fair score of 1.3. The credit ratings are NF/NR.
Finally, we go to dividend metrics. CODI has paid the same common stock dividend for the last 7 years. Thus, there is no growth. And their current yield is almost equal to the 10-year median yield. This indicates to me that there is no basic change in market sentiment. It is also interesting that the stock price has increased 45% from the 52-week low.
First BanCorp is another Puerto Rican bank with branches in Puerto Rico, the Virgin Islands and Florida. They have 2 issues in this group (OTCPK:FBPRL and OTCPK:FBPRM) with prices at $24 and $24.96 and yields of approximately 7.4%. The earnings, payout ratios and debt ratios all look good. In fact, their earnings come in with a perfect record of 5 years and 5 quarters of profits. The credit ratings are NR/NF.
The last metric is dividends. FBP has not paid a common stock dividend since 2009, but on 12/2018, they revived their dividend again with a quarterly dividend of $.03.
Here is First BanCorp’s GAAP earnings’ record for the last 5 years and 5 quarters.
National General Holdings Corp (NGHC) is a specialty personal lines insurance holding company that provides a variety of insurance services, including auto, RV, motorcycle, health and other niche services. They have 2 non-cumulative preferred issues (NGHCO & NGHCN) under $24 with yields at 7.8% and 8%. Their earnings are almost perfect with 5 years of profits and 4 quarters of profits. All metrics other than credit ratings look very good. All 3 payout ratios are excellent, the debt ratios are good and the dividend metrics are good, including the dividend growth scores.
Here is National General Holding’s GAAP earnings' record for the last 5 years and 5 quarters.
OFG Bancorp (NYSE:OFG) is the 3rd Puerto Rico bank in the group. This bank is different in that it only has branches in Puerto Rico. It has 2 non-cumulative preferred issues (OFG.PA & OFG.PB) with prices just above $25 and with yields at 7%. All metrics other than credit ratings are excellent. The earnings show 4 years out of 5 of profits and 5 out of 5 quarters of profits. Payout and debt ratios are good with very low scores. Like the other 4 companies in this group of stocks, the credit ratings are below investment grade.
Dividends have been paid every quarter since 2004 and recently were raised from $.06 to $.07 in January of 2019. Their dividend growth rate is 5.6% and the current yield is fairly close to the 10-year median. Both issues are also close to 52-week highs.
Here is OFG Bancorp’s GAAP earnings' record for the last 5 years and 5 quarters.
The purpose of this article was to introduce the highest yielding non-cumulative preferred stocks in the marketplace. In doing so, we learned that non-cumulative preferred stock dividends can be skipped without any penalty or any requirement to pay it back to the shareholder. That definition does not sound too encouraging, but the current list of 152 non-cumulative preferred stocks show twice as many are rated investment grade than cumulative preferred stocks.
This article highlighted 5 companies with 8 non-cumulative preferred stocks, including 3 Puerto Rican banks, 1 insurance company and 1 financial company. Prices range from $21.26 to a high of $25.29 and yields range from 6.5% to 8.5%, with the average yield of 7.4%. 7 of the 8 issues are tax advantaged.
I did a general review using the Where’s the Metrics analysis system that analyzes earnings, payout ratios, debt ratios, credit ratings and dividend metrics. This review pointed out that all but CODI showed good scores in all areas except for credit ratings. And even though CODI’s scores were lower, they also had good scores in enough areas to warrant additional research from interested investors. After all, CODI has the highest yield of the 8 issues so each investor must determine their own level of risk to reward.
In general, each of these companies have fair to good scores and the yields appear to be reasonably high. How much difference does it make that these are non-cumulative preferred stocks instead of cumulative preferred stocks? I hope that this review has uncovered 1 or more income investments for consideration.
Thanks for reading.
Disclosure: I am/we are long CODI.PA, FBPRL, NGHCN. 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.
Additional disclosure: This article was written for informational purposes only and is not intended as personal investment advice. Readers are advised to do their own due diligence if there is interest in the securities listed in the article.