Seeking Alpha

New Preferred Stock IPOs, June 2019

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Includes: AHH, ATH, BAC, D, GDV, GDV.PH, NLY, NRZ, SNV, TRTN, VOYA, VOYA.PB
by: Doug K. Le Du
Doug K. Le Du
Newsletter Provider, Dividend Investing, author, preferred stock researcher
Summary

Ten new preferred stocks were introduced during June, offering an average annual dividend of 6.5 percent.

There are currently 125 high-quality preferred stocks selling for an average price of $25.81 per share (investment grade, cumulative dividends).

29 of these high-quality issues are now selling below their $25 par value, offering an average current yield of 5.0 percent.

U.S.-traded preferred stocks are now returning an average current yield of 6.7 percent.

With downward pressure on interest rates building over the last several weeks, preferred stock issuers took the opportunity to introduce ten new securities during June. As the month came to a close, the average market price for all U.S.-traded preferred stocks was $25.27, up $0.08 per share over the last month but right where they were twelve months ago.

June’s new preferred stocks

June’s ten new preferred stocks are offering an average annual dividend (coupon) of 6.5 percent, an average current yield (which does not consider reinvested dividends or capital gain/loss) of 6.3 percent and an average Yield-To-Call (which does consider reinvested dividends and capital gain/loss) of 6.0 percent (using June 28 prices).

Note that I am using the IPO date here, rather than the date on which retail trading started. The IPO date is the date that the security’s underwriters purchased the new shares from the issuing company.

A special note regarding preferred stock trading symbols: annoyingly, unlike common stock trading symbols, the format used by exchanges, brokers and other online quoting services for preferred stock symbols is not standardized. For example, the Series A preferred stock from Public Storage is “PSA-A” at TDAmeritrade, Google Finance and several others, but this same security is “PSA.PR.A” at E*Trade and “PSA.PA” at Seeking Alpha. For a cross-reference table of how preferred stock symbols are denoted by sixteen popular brokers and other online quoting services, see “Preferred Stock Trading Symbol Cross-Reference Table.”

There are currently 125 high-quality preferred stocks selling for an average price of $25.81 (June 28), offering an average current yield of 5.4 percent. And 29 of these high-quality issues are selling below their $25 par value, offering an average current yield of 5.0 percent. By high-quality I mean preferreds offering the characteristics that most risk-averse preferred stock investors favor, such as investment grade ratings and cumulative dividends.

There is now a total of 913 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

Buying new preferred stock shares for wholesale

Note that TTONF from Triton International Limited (TRTN), ACAXP from Annaly Capital Management (NLY), NRXPP from New Residential Investment Corp. (NRZ) and SYNXP from Synovus Financial Corp. (SNV) are still trading on the wholesale Over-The-Counter exchange. OTC trading symbols are typically temporary until these securities move to their retail exchange, at which time they will receive their permanent symbols.

But there is no need to wait. Individual investors, armed with a web browser and an online trading account, can often purchase newly introduced preferred stock shares at wholesale prices just like the big guys (see "Preferred Stock Buyers Change Tactics For Double-Digit Returns" for an explanation of how the OTC can be used to purchase shares for discounted prices).

Those who have been following this strategy of using the wholesale OTC exchange to buy newly introduced shares for less than $25 are more able to avoid a capital loss if prices drop (if they choose to sell).

Your broker will automatically update the trading symbols of any shares you purchase on the OTC. TTONF will become TRTN-B (NYSE:TRTN.PB), ACAXP will become NLY-I (NYSE:NLY.PI), NRXPP will become NRZ-A (NYSE:NRZ.PA) and SYNYP will become SNV-E (NYSE:SNV.PE).

About the new preferred stock issues

GDV-H (GDV.PH) is from Gabelli Dividend & income Trust (GDV), part of the Gabelli stable of Closed-End Funds. Offering 5.375 percent cumulative dividends, this Moody’s investment grade (Aa3) preferred stock has been trading above its $25.00 par value since it was introduced in early June. “Cumulative” dividends can be deferred by the issuing company, but they cannot be suspended. If the company misses a dividend payment to you, its obligation to pay you accumulates (it still owes you the money). Proceeds from GDV-H are being used to redeem half of the outstanding shares of the fund’s Series E preferred stock. This fund was created in 2003.

ATH-A (NYSE:ATH.PA) is a 6.35 percent traditional preferred stock from Athene Holding (ATH), the company’s first preferred stock issue. Founded last year in Bermuda, ATH is an $8.3 billion retirement services company that “... issues, reinsures, and acquires retirement savings products in the United States and Bermuda.” ATH-A enjoys an investment grade rating from S&P (BBB-) but comes with non-cumulative dividends and somewhat unusual ten-year call protection (June 30, 2029). As with GDV-H discussed above, ATH-A was very well-received, its market price trading above its $25 par value since introduction.

AHH-A (NYSE:AHH.PA) is the first preferred stock issued by Armada Hoffler Properties, Inc. (AHH). Armada is a $1.1 billion diversified property REIT specializing in office, retail and some multi-family real estate, primarily throughout the eastern United States. AHH-A is unrated and offers 6.75 percent cumulative dividends. The $53 million net proceeds from AHH-A are being used to partially fund the company’s recent acquisition of Thames Street Warf, a 260,000+ square foot office building in Baltimore for $101 million. The company was founded in 1979 and is headquartered in Virginia Beach, Virginia.

DCUE (DCUE) is a very complex security from Dominion Energy, Inc. (D), offered as “equity units,” not preferred stock shares, and has no call date. From the prospectus: “Each Equity Unit will have a stated amount of $100 and initially will be in the form of a 2019 Series A Corporate Unit (‘Corporate Unit’) consisting of a purchase contract issued by us and, initially, a 1/10, or 10%, undivided beneficial ownership in one share of 1.75% Series A Cumulative Perpetual Convertible Preferred Stock, without par value, with a liquidation preference of $1,000 per share, issued by us (‘convertible preferred stock’). The purchase contract will obligate you to purchase from us, on June 1, 2022, for a price of $100, a number of newly-issued shares of our common stock equal to the settlement rate, which will not exceed 1.3529 shares (subject to anti-dilution adjustments), as described in this prospectus supplement.” Then, once you own the Corporate Units, “You can create 2019 Series A Treasury Units (“Treasury Units”) from Corporate Units by substituting Treasury securities for your convertible preferred stock comprising a part of the Corporate Units, and you can recreate Corporate Units by substituting your convertible preferred stock for the Treasury securities comprising a part of the Treasury Units, in each case, subject to certain conditions described in this prospectus supplement.” And there you have it. Given the alternatives available to retail preferred stock investors, it is not clear why DCUE would be attractive.

VOYA-B (VOYA.PB) is from Voya Financial (VOYA), offering an investment grade S&P rating (BBB-) but non-cumulative 5.35 percent dividends. Like ATH-A above, VOYA-B has a somewhat long 10-year call protection period (September 15, 2029). VOYA was formerly known as ING U.S., Inc. and “... operates as a retirement, investment, and employee benefits company in the United States.” VOYA-B is the company’s only currently-trading preferred stock. Note that while the description of this security as published at the top of its prospectus refers to this security as having a “Fixed-Rate,” it does not. The coupon paid by this security is better described as Fixed-to-Floating, since the rate, while fixed until the security’s September 15, 2029 call date, becomes variable at that time and resets during each “reset period” using a formula based on the five-year Treasury rate.

TTONF/TRTN-B is offered by Triton International Ltd., the world’s largest lessor of shipping containers and chassis. Coming off of a multi-year container glut, Triton posted a 25 percent profit margin on December 30, 2018, and managed to beat analysts' EPS estimates every quarter last year. While the company’s operating performance is enviable, its whopping $7.5 billion long-term debt probably explains in large measure the meager B+ rating from S&P. During March of this year, the company issued its first preferred stock, TRTN-A, and used the proceeds to execute a common share buyback (all 7.1 million shares held by Warburg Pincus LLC were sold to underwriter Morgan Stanley, with Triton then buying 1.5 million of these shares from MS). Some of the $121 million proceeds of the new TTONF/TRTN-B are also being used to purchase common shares. This is a somewhat unique strategy, and will also benefit the company if doing so increases the value of its common shares by more than the 8.0 percent in annual dividend expense it is going to incur with this new preferred stock. Some proceeds are also being used to pay down debt, but doing so converts debt into equity on the company’s books, diluting common share value. TRTN is a $2.4 billion company founded in 1980 with headquarters in Bermuda.

Bank of America (BAC) was back in the preferred stock market during June for the second time in eleven months with its 5.375 percent non-cumulative Series KK preferred stock, BAC-M (NYSE:BAC.PM). This security raised net proceeds of a whopping $1.3 billion. This non-cumulative security offers double-investment grade ratings (Baa3/BBB-). While the proceeds from the last two BAC preferreds (BAC-B and BAC-K) were used to redeem older issues with higher dividend rates, it is less clear that doing so is an option for BAC-M proceeds. It’s not that BAC does not have any older, callable preferreds to pick from; there are eight such issues currently trading. Rather, BAC has already redeemed its older, fixed-rate preferreds, leaving only its older, variable-rate issues to pick from. And all of these callable, variable-rate preferreds, issued between 2003 and 2008, use the 3-month LIBOR plus a small incremental percentage (less than one percent) as their currently applicable dividend rate. With the 3-month LIBOR currently at 2.35 percent, BAC’s callable preferred stocks are costing them less than 3.35 percent in annual dividend expense. The only BAC preferred that is at risk of being called using proceeds from the new BAC-M would be BAC-W. BAC-W pays a fixed 6.625 percent and becomes callable on September 9, 2019.

ACAXP/NLY-I from Annaly Capital Management is a traditional preferred stock paying cumulative dividends. This security offers a “fixed-to-float” dividend rate structure, paying a fixed 6.75 percent dividend until its June 30, 2024 call date. At that time, the dividend rate of this security becomes variable based on the three-month LIBOR rate plus 4.989 percent. Annaly is using the proceeds from the new ACAXP/NLY-I to redeem all outstanding shares of its NLY-C (7.625 percent), delivering an annual dividend expense savings of $2.4 million. Annaly is a $13 billion mortgage REIT founded in 1996 and headquartered in New York City.

NRXPP/NRZ-A is an unrated traditional preferred stock from New Residential Investment Corp. offering cumulative 7.5 percent annual dividends. The rate will remain fixed at 7.5 percent until this security’s August 15, 2024 call date. At that time, the coupon will float based on the three-month LIBOR rate plus 5.802 percent. This is NRZ’s first preferred stock. NRZ is a $6.4 billion mortgage REIT founded in 2011.

SYNXP/SNV-E is offered by Synovus Financial Corp. with Ba3/BB- ratings. As has been the case with bank-issued preferreds since the Wall Street Reform Act was signed into law in July 2010, SYNXP/SNV-E offers non-cumulative dividends (allowing this bank to count the value of its preferred stock issues toward its Tier 1 Capital regulatory reserves). SYNXP/SNV-E is the company’s second preferred issue, with SNV-D issued in June 2018 at 6.3 percent. This security offers a “fixed-to-float” dividend rate structure, paying a fixed 5.875 percent dividend until its July 1, 2024 call date. At that time, the dividend rate of this security becomes variable based on the five-year U.S. Treasury Rate (current at 1.76 percent) plus 4.127 percent. Synovus is a $5.5 billion bank holding company for Synovus Bank, a retail bank with branches operating throughout the southeastern Unites States.

(Sources: Preferred stock data - CDx3 Notification Service database, PreferredStockInvesting.com. Prospectuses: GDV-H, ATH-A, AHH-A, DCUE, VOYA-B, TTONF/TRTN-B, BAC-M, ACAXP/NLY-I, NRXPP/NRZ-A, SYNXP/SNV-E)

Preferred Stock Tax treatment

The 2017 Tax Relief Act included a provision aimed at small businesses that also delivers an enormous benefit to those holding shares of preferred stocks issued by REITs (which is pretty much all of us). Most small businesses are incorporated as a Limited Liability Corporation (LLC). Under this structure, the company’s earnings are passed through to the owners, who then pay the tax on their personal returns. The Act allows those receiving such income to deduct, right off the top, up to twenty percent of this “pass-through income.”

But remember that REITs do the same thing as LLCs - at least 90 percent of a REIT’s earnings are passed to the REIT’s shareholders primarily in the form of preferred stock dividends; the shareholders then pay the tax on their personal returns. In other words, preferred stock dividends received from REITs qualify under the Act’s “pass-through income” provision and are therefore deductible up to twenty percent. Such income is reported to you on the 1099 for received from your broker as “Section 199A” income.

The tax treatment of the taxable income you receive from income securities can be a bit confusing, but it really boils down to one question: Has the company already paid tax on the cash that is being used to pay you or not? If not, the IRS is going to collect the full tax from you; if so, you still have to pay tax, but at the special 15 percent rate.

Traditional preferred stock dividends paid by partnerships as pass-through income, or otherwise paid out of pre-tax profits, are taxable as regular income; you pay the full tax, since the company has not (DCUE).

Companies incorporated as REITs are required to distribute at least 90 percent of their pre-tax profits to shareholders. Doing so in the form of non-voting preferred stock dividends is the most common method of complying, and because these dividend payments are made from pre-tax dollars, taxable dividends received from REITs are taxed as regular income (i.e., they do not qualify for the special 15 percent dividend tax rate). For June - AHH-A, ACAXP/NLY-I and NRXPP/NRZ-A.

Interest that a company pays to those loaning the company money is a business expense to the company (tax-deductible), so the company does not pay tax on the interest payments it makes to its lenders (i.e., interest payments made to lenders are paid with pre-tax dollars). Since Exchange-Traded Debt Securities are debt, ETDS shareholders are on the hook for the taxes. Income received from ETDS is taxed as regular income (no ETDS were introduced during June).

Lastly, if a company pays your preferred stock dividends out of its after-tax profits, the dividend income you receive is taxed at the special 15 percent tax rate. Such dividends are referred to as “Qualified Dividend Income,” or QDI. QDI preferred stocks are often seen as favorable for holding in a non-retirement account due to the favorable 15 percent tax treatment. Looking at the Status column in the above table, the prospectuses for six of June’s new issues state that their dividends are QDI-qualified (GDV-H, ATH-A, VOYA-B, TTONF/TRTN-B, BAC-M and SYNXP/SNV-E).

In Context: The U.S. preferred stock marketplace

The following chart illustrates the average market price of U.S.-traded preferred stocks over the past twelve months.

Many things affect the market prices of these securities, such as the proximity to their call or maturity date, proximity to their next ex-dividend date, industry and/or overall health of the issuer, perceived direction of interest rates, pending government regulatory or policy changes, cumulative versus non-cumulative dividends and tax treatment of dividend payments. So, what we really need to look at is current yield, which calculates the average annual dividend yield per dollar invested (without considering re-invested dividend return or any future capital gain or loss). Current yield is a “bang for your buck” measure of value that normalizes differences in coupon rate and price to give us a single, comparable metric.

Moving down the risk scale, the next chart compares the average current yield realized by today’s preferred stock buyers when compared to the yield earned by those investing in the 10-year Treasury note or 2-year bank Certificates of Deposit.

U.S.-traded preferred stocks are currently returning an average current yield of 6.7 percent (blue line), while the annual return being offered to income investors by the 10-year treasury is 2.0 percent and that of the 2-year bank CD has turned the yield curve upside down at 2.8 percent (shorter-term money very rarely offers a higher return than longer-term money).

For comparison, I have set the Yield column in the first table above to show the current yield of the new June preferreds on June 28. It is into this marketplace that June’s new issues were introduced.

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. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The CDx3 Notification Service is my preferred stock email alert and research newsletter service and includes the database of all preferred stocks and Exchange-Traded Debt securities used for this article.