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Fixed Rate Preferred Stocks - Complete Review

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Includes: AHL.PD, AHT, AHT.PF, AHT.PG, AHT.PH, AHT.PI, AXS.PD, AXS.PE, CBL.PD, CBL.PE, CETXP, DD.PA, GSL.PB, HOVNP, MAA.PI, MH.PA, MH.PC, MH.PD, MHLD, NM.PG, NM.PH, NMK.PB, NMK.PC, NMPWP, PCG, PFF, RHE.PA, SB.PC, SB.PD, SPG.PJ
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 359 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 6.7B 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 two months is the dramatic fall of the TNX from 2.5% to the psychological 2% yield mark. Supported by an increasing traders' expectation of a rate cut by the end of the year and the Fed dot-plot reduced expected rates during its June meeting and the following dovish-than-expected press conference, the Treasury yields have settled at their two and a half year low. The fixed-income securities have remained bullish after their New Year's rally, and as we can see in the second chart, PFF has risen more than 10% from their December 2018 lows. As for the equity markets, the S&P 500 hit a new all-time high, driven mostly by the dovish Federal Reserve statement and the very fresh news about President Trump and Chinese leader Xi Jinping reaching a truce in the US-China trade war.

The Review

1. Redemption Risk by Years-to-Call and Yield-to-Call:

In simple terms, these securities are trading above their par value and can be subject to redemption at any time. The immediate capital loss leads to negative returns. 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

The investment-grade qualified dividend rate preferred stocks, that are currently trading below par value, are on an average Yield-to-Worst (equal to their Current Yield) of 5.30%.

Not Qualified:

Source: Author's database

It is also the same picture for the not-qualified dividend rate preferred stocks, which also have an average Current yield of 5.30%.

3. Current Yield < 5%:

Source: Author's database

There are only three securities in this section, the 70-year-old Niagara Mohawk (OTC:NMPWP) preferred stocks, NMK.PB and NMK.PC, and also the 3-year older, Corteva Inc $3.50 Series Cumulative Preferred Stock (CTA-A), the old DD.PA.

4. Current Yield Between 8% and 10%:

As in section 2, these are the preferred stocks that are trading below their par value and the Current Yield is also their Yield-to-Worst.

Source: Author's database

With some exceptions, this 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.

Qualified:

Source: Author's database

This group is currently trading at the average Current Yield of 8.75%.

Not Qualified:

Source: Author's database

The not-qualified ones give an average of 8.50%.

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 12 preferreds have their distribution suspended. These are RHE.PA, HOVNP, NM.PH, NM.PG, MHLD's preferred stocks (MH.PA, MH.PC, and MH.PD) and CETXP. A real surprise is the CBL.PE and CBL.PD continue to pay their dividends and currently trade close to $8 (at 32c for every dollar). Unlike the previous month, 3 issues dropped out of this group and fall into the less speculative 8%-to-10% group. These are GSL.PB, SB.PC, and SB.PD.

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.PI, SPG.PJ, and AHL.PD, which become callable in more than 7 years.

What we see here is the flattening of the yield curve, thanks to the alignment of the Fed's dot plot.

Source: CNBC.com | Federal Reserve Dot Plot June 2019

8. The Yield Curve Investment Grade:

Source: Author's database

Qualified:

Source: Author's database

Not Qualified:

Source: Author's database

The trend of flattening of the Yield curve is also observed in particular for the investment-grade preferred stocks.

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%:

With the expectations of lowering the Federal Funds Rate and the continuous rising of all fixed-income securities, it becomes harder and harder to find quality preferred stocks with a decent return, without affecting the safety of the investment. In the following table, there are 7 preferred stocks with Yield-to-Call of above 4.5% (it is the Yield-to-Worst of 5 of the stocks) and Current yield of above 5.50% (the Yield-to-Worst of the other two stocks) at the same time.

Source: Author's database

11. Ex-Dividend Dates for July 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 fixed rate preferred stocks called for redemption since the start of the previous month.

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 in June:

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

Generally, the group's movement in the last month is more positive than negative, which is also expected in view of the positive global sentiment.

  • Top Gainers:

Source: Author's database

  • Top Losers:

Source: Author's database

The Ashford Hospitality Trust (AHT) is the most losing company in June as the common stock is at its 10-year low testing the $3 level because of a dividend cut announced on June 14. Its preferred stocks, AHT.PI, AHT.PF, AHT.PH, and AHT.PG, have lost between 6% and 10% of its value due to the decreased creditworthiness and the outlook remains negative.

Source: Tradingview.com

Conclusion

This is what our small world of fixed-rate preferred stocks looks like at the start of July, just after the two-day Fed meeting on 18th and 19th last month and the FOMC decision on the monetary policy on Wednesday, June 19. After the amazing New Year's rally, the prices of all fixed-income securities seem sky high and slowly the rally is still going on. 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. In fact, the only securities that are currently in a bad shape are solely because of an increased risk to the well-being of the company.

I find quality preferred stocks AXS.PE and AXS.PD to give a decent return. Locked at the Current Yield of 5.50% may do not sound like something extraordinary, but at the discounting cost of financing of all companies, these two do not carry any call risk and pay a qualified dividend at the nominal rate of 5.50%. Also, I find the newly issued BAC-M as a preferred stock that is worth to consider. It is still trading at its par value and despite it has the lowest nominal yield of the company's fixed-rate preferred stocks, it has 1.00% higher Yield-to-Worst. In a low-interest rate environment, at this point, BAC-M is the best you can get from a banking preferred stock, without increasing your credit risk.

Note: This article was originally published on July 01, 2019, and some figures and charts may not be entirely up to date.

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.