Seeking Alpha

Fixed-Rate Preferred Stocks - Complete Review

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Includes: ACGLP, AHL.PD, AXS.PD, BBT.PF, BBT.PG, CBL.PD, CBL.PE, CETXP, FRC.PH, HOVNP, KIM.PL, MAA.PI, MH.PA, MH.PC, MH.PD, MHLD, NM.PG, NM.PH, NNN.PF, PCG, PFF, PSA.PW, PSB.PW, RHE.PA, SPG.PJ, VNO.PL
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 355 issues in our database that trade on primary exchanges, excluding the convertible preferred stocks, 60% of which are part of the largest primary exchange-traded fixed-income ETF: iShares Preferred and Income Securities 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 6.8B 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 Preferred and Income Securities ETF (PFF)

Source: Tradingview.com

SPDR S&P 500 ETF (SPY)

Source: Tradingview.com

The most significant indicator for all fixed-income investors, the 10-Year Treasury Note Yield (TNX), has broken through the psychological 2% yield mark, and it is currently at the rate of 1.74%. Supported on the one hand by the first Fed rate cut in over a decade and the investors who seek the risk off of the government bonds, the Treasury yields have settled at almost a 3-year low. Nevertheless, the fixed-income securities, as we can see in the second chart, recorded their worst day since the start of the year. With the resurgent US-China trade war, the preferred stocks and exchange-traded debt securities might be entering into correction territory, after the solidity rally and the PFF 10% gain from its December 2018 lows. As for the equity markets, the S&P 500 has sharply turned lower from the $300 barrier after President Trump says he intends to impose an additional 10% tariff on the "remaining" $300B of goods and products imported from China and the Asian country backlash with devaluation of the yuan at the significant threshold of 7 CNH to a dollar. With the deepening tension, the S&P 500 has fallen as much as 5% since the start of August.

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.

Overall, there are a total of 90(!) preferred stocks that pay a fixed distribution rate and bear a negative Yield-to-Call. Otherwise, these are 25%(!) of all examined securities.

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

Ten investment-grade preferred stocks to trade below their par value (with a Current Yield of between 5% and 8%), so the negative yields above should not be a surprise. FRC-H, BBT-G, AXS-D, BBT-F, and ACGLP pay a qualified dividend rate and PSA-W, NNN-F, KIM-L, VNO-L, and PSB-W have their dividend not-qualified. The average Yield-to-Worst (equal to their Current Yield) of all is currently at the rate of 5.24%. You can see some more information in the chart below:

Source: Author's database

3. Current Yield < 5%:

Source: Author's database

There are only five securities in this section, with an average of 69 years old. Take a look at the full list:

Source: Author's database

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, and they have to bring a significant additional risk to have such yields in this lower yield environment.

Qualified:

Source: Author's database

This group is currently trading at the average Current Yield of 8.87% (0.12%. higher since the last month's article).

Not Qualified:

Source: Author's database

The not-qualified ones give an average of 8.88%. (0.38% higher for a month).

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 $7 (at 28c 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.PI, SPG.PJ, and AHL.PD, which become callable in more than 7 years.

8. The Yield Curve Investment Grade:

Source: Author's database

Qualified:

Source: Author's database

Not Qualified:

Source: Author's database

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% and YTC > 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 11 preferred stocks with Yield-to-Call of above 5% (it is the Yield-to-Worst of 5 of the stocks) and a Current Yield of above 5% (the Yield-to-Worst of the other 6 stocks) at the same time.

Source: Author's database

Again, the full list:

Source: Author's database

11. Ex-Dividend Dates for August 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:

There are 10 fixed-rate preferred stocks called for redemption since the start of the previous month.

Source: Author's database

14. A Look at the Most Recent IPOs:

And the two newly issued preferred stocks:

Allstate Corp., 5.10% Dep Shares Fixed Rate Noncumul Perp Preferred Stock Ser H (ALL-H)

Source: Author's spreadsheet

ALL-H is still trading on the Grey market under the temporary ticker symbol ALLZL.

... and

Highland Income Fund, 5.375% Series A Cumulative Preferred Shares (HFRO-A)

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

Conclusion

This is what our small world of fixed-rate preferred stocks looks like at the start of August, just after the widely expected Fed decision on July 31. 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 yesterday (August 5) is the first more tangible negative day. Despite the more hawkish than expected Fed, the fixed-income remained bullish, and it is still 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. Currently, there is nothing that is worthy to buy, and personally, I'm holding a slight short portfolio of stocks, waiting for better entries. The 5% yield currently is just not enough, and from being oversold in January, all stocks quickly become overbought just for several months. It is also proved by the fact that 1/4 of all fixed-rate preferreds carry a negative Yield-to-Call. The public just buys everything, without taking care of the call risk lured by the rapid upward movements. Sometimes the no-trade is the best-trade, even though it is the hardest, and I believe this is the case now. Still, there are some rare opportunities on a relative basis that we hold, for which we inform our subscribers and the public in a timely manner once such an opportunity occurs.

Note: This article was originally published for our subscribers on 8/06/2019 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.