Fixed Rate Preferred Stocks - Complete Review

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Includes: CBL.PD, CBL.PE, CETXP, DTLA.P, HOVNP, MAA.PI, MH.PA, MH.PC, MH.PD, MHLD, NM.PG, NM.PH, NMK.PB, NMK.PC, PCG, PFF, RHE.PA, SPG.PJ, SR.PA
by: Arbitrage Trader
Summary

Fixed rate preferred stocks - complete review.

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 358 issues in our database that trade on primary exchanges, excluding the convertible preferred stocks, 60% 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 half of the fund's holdings. This means that we are talking of around 6.6B 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 the dramatic fall of the TNX from 2.5% yield mark to the rate of 2.11%. Supporting traders' expectation of a 50% chance the Fed cuts rates at its July meeting and a 91.4% probability that the central bank lowers rates before year-end, the Treasury yields have settled at their 21-months low, nearing its two and a half year bottom. However, the main fixed-income benchmark, PFF, stays at its 10% gain from its December 2018 lows, and despite the constant rally in the Treasury bonds, it consolidates in the last three months. As for the equity markets, the S&P 500 has entered into a 7% correction from its all-time high. Besides the protracted US trade dispute with China, the administration has opened several other conflicts, removing India from a privileged-trading program and pushing tariffs on Mexico unless it addresses the southern border.

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. Furthermore, on Jan. 29, 2019, the company has filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California.

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

They are all trading very close to the 5% yield mark.

3. Current Yield < 5%:

Source: Author's database

There are only two securities in this section, the 70-year-old Niagara Mohawk (OTC:NMPWP) preferred stocks, NMK-B and NMK-C.

4. Current Yield Between 8% and 10%:

Source: Author's database

A group consisting mainly of REIT and Shipping preferreds. None of these stocks bears an investment grade rating, although they have to bring extra risk because there is no free lunch. Furthermore, please note that the Brookfield DTLA Fund Office Trust Investor 7.625% Series A Cumulative Redeemable Preferred Stock (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.

Qualified:

Source: Author's database

Not Qualified:

Source: Author's database

5. Current Yield > 10%:

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. It is also proved by the fact that 8 of the 17 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. A real surprise is the CBL-E and CBL-D continue to pay their dividends and currently trade close to $8 (at 32c for every dollar). Here is some more information about all issues:

Source: Author's database

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

What we see on the yield curve is the rising yields to the 2.5 years to call and then flattening, even a slight fall, to the 5 years to call. The reason why we can explain it is the future expectation of lowering interest rates.

9. The Term Preferred Stocks:

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

Source: Author's database

By Years-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 > 5.5% and YTC > 4.5%:

Source: Author's database

The full list:

Source: Author's database

11. Ex-Dividend Dates for June 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:

These are the most recent fixed rate preferred stocks called for redemptions:

Source: Author's database

Take a look at the full list:

Source: Author's database

14. A Look at the Most Recent IPOs:

And the preferred stocks issued for the past two months:

Source: Author's spreadsheet

Again, the full list:

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

Overall, in the last month, there weren't any major movements up or down and the group is tightly gathered between -$0.5 and +$0.5 price movement. Yet, here are the biggest gainers and losers for the past month.

  • 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 June, just before the Federal Funds Rate decision on June 19. There is a new IPO that fell into my radar, and I find a strong potential in it despite the expectations for a rate cut. It is the Spire Inc. preferred stock, SR-A. I explain my idea more detailed in the article "Spire Inc.: Achieve 10% Return In The Next 6 Months With This Utility Preferred Stock", which you can freely check by clicking on the link.

Note: This article was originally published on June 03, 2019, and some figures and charts may not be entirely up to date.

Disclosure: I am/we are long SR.PA. 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.