Fixed-To-Floating Preferred Stocks And Units Complete Review

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Includes: CODI, DLNG, NLY.PG, NS, PFF, PGF, PGX, PMT.PA, PMT.PB, TOO, VRP, WFC.PQ, XAN.PC
by: Arbitrage Trader
Summary

Fixed-to-floating preferreds and units sorted into groups.

How does the yield curve look?

What has changed for the past month?

In this article, I'll review the fixed-to-floating rate preferred stocks and units, sorted into several categories. There are 90 issues in our database that trade on primary exchanges. Maybe the most important ETF for this type of security is the Invesco Variable Rate Preferred ETF (VRP). As we can see in the charts below, despite the fact that more than a half of the holdings are corporate bonds, which occupies almost 3/4 of the market capitalization of the fund, still, with $400M in preferred stocks, VRP has no analog in regard to floating rate securities.

Source: Author's spreadsheet

However, when we are talking about fixed-income ETFs, the influence of the iShares U.S. Preferred Stock ETF (PFF), the Invesco Financial Preferred Portfolio ETF (PGF), and the Invesco Preferred Portfolio ETF (PGX) should not be underestimated, as with a total of $20B of preferred stocks and baby bonds, they are the benchmark of this market. I'll just remind you about last year's rally in fixed-income borne from the redemption of the two "giants" HSEA and HSEB and the released cash of over a billion dollars used from PFF, PGF, and PGX to buy more of the rest of its holdings.

We are continuously monitoring all preferred stocks by several groups and will reinstate our Monthly Review, publishing a recap of the groups of interest. 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

Invesco Variable Rate Preferred 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 2.09%. 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 variable rate preferred ETF, VRP, has risen 10% from its December 2018 lows, and despite the constant rally in the Treasury bonds, it consolidates in the last two months. As for the equity markets, the S&P 500 has added more than 5% for a week, after it previously entered into a 7% correction from its all-time high. Driven by a steady stream of positive news, including the hopes of a near-term rate cut from the Federal Reserve and President Trump's decision to suspend planned tariffs against Mexico, the futures are heading for a new all-time high.

The Review

1. All Fixed-To-Floating Preferred Stocks And Units

Here, I will post the Yield Curve for all that are probably redemptions in the next 10 years. The point here is that their Yield-to-Call is the best you can get out of them, because after they become floating, they also become redeemable, which pins their price to par after their call date. If the stock trades higher than its par plus accrued dividend after the call date, it will have a negative Yield-to-Call, and to have such an expectation is financially unreasonable.

1.1 Qualified Yield curve:

  • By Years-to-Call and Yield-to-Call:

Source: Author's database

  • By Yield-to-Call and Current Yield:

Source: Author's database

1.2 Not Qualified:

  • By Years-to-Call and Yield-to-Call:

Source: Author's database

  • By Yield-to-Call and Current Yield:

Source: Author's database

2. Financials

Here is a close view of all high-quality financial preferreds, most of them are capped between 4% and 5%. This in practice is no significant change in the Yield Curve of the group since our previous article in April.

  • By Years-to-Call and Yield-to-Call:

Source: Author's database

  • By Yield-to-Call and Current Yield:

Source: Author's database

  • The Full List

Source: Author's database

3. REIT Fixed-to-Floaters

They all pay a non-qualified dividend rate. The average Yield-to-Call of this group is sitting at a rate of 7.40% (a 0.20% (↓) shift of the Yield Curve since the April article).

  • By Years-to-Call and Yield-to-Call:

Source: Author's database

  • By Yield-to-Call and Current Yield:

Source: Author's database

  • The Full List

Source: Author's database

4. The High-Yield Ones

This is a list of the Shipping, Energy related and other high-yield preferred stocks, with an average Yield-to-Call of a 10.90% (a shift of 0.80% (↓) for two months).

  • By Years-to-Call and Yield-to-Call:

Source: Author's database

  • By Yield-to-Call and Current Yield:

Source: Author's database

  • The Full List

Source: Author's database

5. Ex-Dividend Dates

Which fixed rate preferred stocks are ex-dividend until the end of the month? The dates given are predicted on the basis 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 practices the dividend capture strategy.

6. A Look At The Most Recent IPOs

There are six 5 fixed-to-floating rate preferred stocks and units, issued for the past two months:

Source: Author's database

Athene Holding Ltd. 6.35% Fixed-to-Floating Rate Perpetual Non-Cumulative Preference Shares, Series A (NYSE: ATH-A) is the only one still trading on the grey market under the temporary ticker symbol ATHDF.

7. How do they move?

Here is the general idea of how the fixed-to-floating rate preferred stocks and units moved for the last month:

Source: Author's database

The Dynagas LNG (DLNG) preferred securities are in a shakedown after the company lost 80% of its market capitalization for half a year.

Source: Tradingview.com

Other issues who are currently in bad shape are Tsakos Energy (TNP) and Teekay Offshore's (TOO) preferred stocks as on the opposite pole are located Compass Diversified (CODI) and its preferred stocks, after the Barron's article about the company.

Source: Tradingview.com

Conclusion

This is what our small world of fixed-to-floating rate preferred stocks looks like at the start of June. After the amazing New Year's rally, the prices of all fixed-income securities seem a sky high. In fact, yields fall with each month and there is no correction since December last year. This may be justified as more and more chances for a rate cut has increased. It is now hard to find a worthy stock without adding some extra credit risk. At this moment, I don't like the oil-related stocks, and I'm even bearish on NuStar Energy LP (NS). As for the REIT ones, I like the mREITs, NLY-G, XAN-C, PMT-A and PMT-B which also look good with stable performance of their common stocks. As a negative thing, however, is the non-qualified dividend they distribute. If you are looking for a safer issue, WFC-Q is probably one of the best currently. Gives a 5% Yield-to-Worst for 4 years, pays a qualified dividend and there is no better stock to carry an investment grade credit rating.

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.