Seeking Alpha

Fixed-Rate Preferred Stocks - Complete Review

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Includes: ACGLP, AHL.PD, CBL.PD, CBL.PE, CETXP, DTLA.P, FITB, HOVNP, MAA.PI, MBFIO, MH.PA, MH.PC, MH.PD, MHLD, NLY.PD, NM.PG, NM.PH, PCG, PFF, RHE.PA, SCE.PC, SCE.PD, SPG.PJ, SRC.PA, TLT
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 354 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 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 has fallen to the rate of 1.45%. With the iShares 20+ Year Treasury Bond ETF (TLT) reaching its all-time high this month, a 2-10 yield curve inverting was observed for the first time since 2007. All bond prices are rising as investors prefer to put their money into safer investments, pushing yields lower, and triggering a recession warning. An inversion for this part of the yield curve, where the 10-year yield slips below the 2-year yield, has preceded every recession in the last 40 years. The current yield of the 2-year Treasury Note is at 1.45% (equal with the 10-year). Despite the risk of recession, the fixed income securities have followed the bond rally and remained slightly bullish, and as we can see in the second chart, PFF has continued its rise with more than 11% gain from its December 2018 lows, supported mostly by the high expectations of a series of rate cuts between now and the end of the year. For information, the next FOMC meeting will be held on September 17 and 18 and the investors are currently pricing a 64% probability for a rate cut after the two-day meeting. As for the equity markets, the S&P 500 has been on a roller coaster, with the coming new wave of the US-China trade war, the rising fears of a new recession and entering a world of negative interest rates.

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 104(!) preferred stocks that pay a fixed distribution rate and bear a negative Yield-to-Call. Otherwise, these are almost 1/3(!) of all examined securities. For reference, it is an increasement with 14 securities from the last month's article.

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.

The only investment-grade preferred stock in this group is ACGLP, and with SCE.PD and SCE.PC (BB+) are the only rated securities 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.

3. Current Yield < 5%:

Source: Author's database

There are only five securities in this section, with an average of 68 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. And this is completely normal after their companies' common stocks are trading at their lows. Also, 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

This group is currently trading at the average Current Yield of 8.66% (0.21%. lower since the last month's article). Take a look at the full list:

Source: Author's database

Not Qualified:

Source: Author's database

The not-qualified ones give an average of 8.77%. (0.11% lower for a month). The full list:

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 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.

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.

8. The Yield Curve Investment Grade:

Source: Author's database

Qualified:

Source: Author's database

The average Yield-to-Call of this group is sitting at a rate of 3.27%.

Not Qualified:

Source: Author's database

The not-qualified ones are sitting at an average Yield-to-Call of 3.85%.

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 > 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 6 preferred stocks with Yield-to-Call of above 4.5% (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 one stock) at the same time.

Source: Author's database

Again, the full list:

Source: Author's database

11. Ex-Dividend Dates for September 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 9 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:

There are also 2 preferred stocks, issued in the past month:

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

Source: Author's spreadsheet

...and

Aspen Insurance Holdings Ltd 5.625% Non-cumulative Perpetual Preference Share (AHL-E)

Source: Author's spreadsheet

In addition, there is one preferred stock that was listed in place of the voluntarily delisted MB Financial Inc 6.00% Non-Cumulative Perpetual Preferred Stock Series C, MBFIO (as a result of the acquisition of MB Financial by Fifth Third Bancorp (FITB )) - Fifth Third Bancorp 6.00% Non-Cumulative Perpetual Class B Preferred Stock Series A (FITBP). FITBP is designed with the same characteristics of the delisted security.

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.

  • 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 September. 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 it is harder and harder 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 exceptional to buy, moreover, 1/3 of all fixed-rate preferreds carry a negative Yield-to-Call. From being oversold in January, all stocks quickly become overbought just for several months. 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 a few preferred stocks you might find interesting for long-term holding: NLY.PD (it is anytime callable from 2 years now, trading close to its par value and gives 7.42% current yield with a call risk of $0.25), SRC.PA (giving 5.52% Yield-to-Worst with 3 years to call date), the newly issued AHL-E, being with the highest YTW of all investment-grade issues, and the other securities from the section 10.

Note: This article was originally published for our subscribers on 09/03/2019 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.