Seeking Alpha

New Preferred Stock IPOs, November 2019

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Includes: AEL, ALL, BXS, CIT, CODI, CODI.PC, EQH, FTAI, GNL, MS, PSA, SACH, SYF
by: Doug K. Le Du
Doug K. Le Du
Newsletter provider, dividend investing, author, preferred stock researcher
Summary

Twelve new preferred stocks were introduced during November offering an average annual coupon of 6.0 percent.

There are currently 126 high quality preferred stocks selling for an average price of $25.77 per share (investment grade, cumulative dividends) offering an average current yield of 5.3 percent.

U.S.-traded preferred stocks are now returning an average current yield of 6.5 percent.

Interest rates and the market prices of existing income securities (preferred stocks and bonds) typically move in opposite directions (rates up, prices down). But since the Fed started raising rates last August, the market prices of U.S.-traded preferred stocks have defied gravity by continuously increasing right along with the upward rate pressure.

That finally changed during November. During the month, the average market price of U.S.-traded preferred stocks finally succumbed and fell by $0.32 per share, ending the month at $25.77. This price drop pushed up the average current yield to today’s buyers by 0.048 percent, now at 6.5 percent.

November’s new preferred stocks

November’s twelve new preferred stocks are offering an average annual dividend (coupon) of 6.0 percent, an average current yield (which does not consider reinvested dividends or capital gain/loss) of 6.0 percent and an average Yield-To-Call (which does consider reinvested dividends and capital gain/loss) of 5.8 percent (using November 29 prices).

Note that I am using 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 TD Ameritrade (NASDAQ:AMTD), Google Finance (NASDAQ:GOOG) (NASDAQ:GOOGL) and several others but this same security is “PSA.PR.A” at E*TRADE (NASDAQ:ETFC) 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 126 high quality preferred stocks selling for an average price of $25.77 (November 29), offering an average current yield of 5.3 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 938 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

Buying new shares for wholesale

Note that AXQEL (AXQEL) from AXA Equitable Holdings (EQH), GBLNP (GBLNP) from Global Net Lease (GNL) and FTABP (FTABP) from Fortress Transportation and Infrastructure Investors LLC (FTAI) 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. AXQEL will become EQH-A, GBLNP will become GNL-B and FTABP will become FTAI-B.

About the new issues

SACC (SACC) is an unrated Exchange-Traded Debt Security from Sachem Capital Corp. (SACH). As bonds (recorded on the company’s books as debt), ETDS often offer a lower risk profile than the same company’s preferred stock (equity). Typically, ETDS become redeemable, at the option of the issuer, five years after they are introduced and mature several decades in the future. SACC, however, is a bit unusual in that it becomes redeemable in November 2021 and matures in December 2024 (shares will be purchased back from shareholders at that time for the bond’s par value, $25.00 per share). SACH is a real estate finance company, offering mortgage loans to borrowers primarily on the east coast. The company was founded in 2010 and is headquartered in Branford, Connecticut.

PSA-J (PSA.PJ) is a 9 million share traditional preferred stock from Public Storage, Inc. (PSA) paying 4.7 percent cumulative dividends. According to the prospectus, the proceeds from this offering will be used for various purposes, “…including the redemption of our preferred shares.” With the introduction of PSA-J, Public Storage has thirteen preferred stock series currently trading, four of which are redeemable – PSA-V, 5.375 percent, 18 million shares; PSA-W, 5.2 percent, 18 million shares; PSA-X, 8 million shares, 5.2 percent; and PSA-A, 5.875 percent, 7 million shares. PSA-A is the most likely candidate for redemption here since (a) the 9 million shares of the new PSA-J is more than enough to call PSA-A’s 7 million shares and (b) of the four redeemable candidates, PSA-A’s 5.875 percent coupon offers the largest dividend expense savings to the company. Public Storage is the highest-rated property REIT in the U.S. (A3/BBB+). PSA-J pays cumulative dividends, meaning that if Public Storage misses a dividend payment to you, they still owe you the money (their obligation to pay you accumulates).

ALL-I (ALL.PI) is a 12 million share, traditional preferred stock paying 4.75 percent dividends from Allstate Corporation (ALL). This security is one of two November preferreds offering double-investment grade ratings (the other being Public Storage’s PSA-J). Note that ALL-I’s dividends are non-cumulative, meaning that if the company misses a dividend payment to you, you’re out; they have no obligation to ever repay the skipped dividend. The prospectus for this security says that the company may use the proceeds to redeem “…certain of our preferred stock.” Although the company has five income securities currently trading, ALL-A (5.625 percent, 10 million shares) is the only one that is currently redeemable (and has been since June 2018). If Allstate uses the proceeds from the new ALL-I to redeem the outstanding shares of ALL-A, the maneuver would save the company about $2.2 million per year in dividend expense.

SYF-A (SYF.PA) is a 5.625 percent traditional preferred stock from Synchrony Financial (SYF) and is the company’s first and only income security. SYF-A raises $750 million for the company. This security has a speculative-grade BB+ rating from S&P. As with all traditional preferred stocks issued by banks since July 2010, this security’s dividends are non-cumulative. The Dodd-Frank Wall Street Reform Act correctly (but unfortunately for us) determined that bank reserves are not really any good if holders of a bank’s cumulative preferred stock shares have a claim to the cash, so all bank-issued preferreds since July 2010 have been non-cumulative. Synchrony is a $24 billion company founded in 2003 and headquartered in Stamford, Connecticut.

CIT-B (CIT.PB) is from CIT Group (CIT) and pays 5.625 percent non-cumulative dividends. CIT-B is the bank’s only currently trading income security. CIT fell victim to the Global Credit Crisis and Great Recession, filing for bankruptcy in November, 2009 then emerging as a bankruptcy success story, to the extent there is such a thing, in August 2013. You might remember a 1960s wildlife show “Mutual of Omaha’s Wild Kingdom” starring an aging guy named Marlin Perkins. Marlin would limp after various animals in the wild, then order his twenty-something co-star to jump on the critter while Marlin stood by straightening his hair. On August 12 of this year, CIT Group announced that “…Mutual of Omaha Bank, a federal savings bank and an indirect wholly-owned subsidiary of Mutual of Omaha Insurance Company, will merge with and into CIT Bank, with CIT Bank surviving as a direct wholly-owned subsidiary of the Company.” The $200 million proceeds from CIT-B will be put toward CIT’s cash obligations of the merger.

CODI-C (CODI.PC) is from Compass Diversified Holdings (CODI), paying 7.875 percent cumulative dividends. While CODI’s preferred stocks are unrated, its long-term debt carries a Moody’s A3 rating. Moody’s typically rates a company’s preferred stock two notches below its debt, implying that CODI-C would offer a Baa2 rating from Moody’s if the company were to have the security rated. The proceeds from CODI-C are being used to pay down debt due in 2025. Doing so converts that debt into equity on the company’s books. The company has two other preferred stocks trading, neither of which are currently redeemable. CODI is a $1 billion (market cap) private equity company established in 2005, investing in middle market companies.

BXS-A (BXS.PA) is a traditional preferred stock from BancorpSouth (BXS) with 5.5 percent non-cumulative dividends. BXS-A is the company’s first and only preferred stock. This security offers Ba1/BB speculative grade ratings and becomes callable on November 20, 2024. BXS provides banking services primarily throughout the southern United States. BancorpSouth is a $3.3 billion regional bank founded in 1876 and headquartered in Tupelo Mississippi.

AEL-A (AEL.PA) is from American Equity Investment Life Holding Company (AEL), the company’s only preferred stock. The dividends paid by this security are a bit complex. As explained in the prospectus “…until, but not including, December 1, 2024 at a fixed rate per annum of 5.95% and (ii) from, and including, December 1, 2024, during each reset period, at a rate per annum equal to the Five-year U.S. Treasury Rate…as of the most recent reset dividend determination date…plus 4.322%.” The document goes on to define various reset periods. The $400 million proceeds from this security are being used to redeem eight debt securities. AEL is a $2.7 billion life insurance company founded in 1995.

MS-L (MS.PL) is a traditional preferred stock from Morgan Stanley (MS) offering 4.875 percent non-cumulative dividends and Ba1/BB+ speculative grade ratings. MS currently has seven preferred stocks trading although the $484 million proceeds from the new MS-L are being used to redeem all outstanding shares of MS-G (6.625 percent). This maneuver will save the company $8.75 million per year in dividend expense. The next Morgan Stanley preferred stock to reach its call date is MS-E (7.125 percent) in October 2023. Morgan Stanley is one of the country’s oldest financial services firms, originally founded in 1924, with a current market capitalization of $80 billion.

AXQEL/EQH-A is a 5.25 percent traditional preferred stock from AXA Equitable Holdings, the company’s first and only preferred stock. AXQEL/EQH-A offers a Ba1 speculative grade rating from Moody’s but a BBB- investment grade rating from S&P. The security’s 5.25 percent dividends are non-cumulative and the shares become callable in December 2024. AXA Equitable is a $12 billion financial services firm offering retirement and wealth management services to individuals and businesses worldwide. EQH was founded in 1859 and is headquartered in New York City.

GBLNP/GNL-B is a traditional preferred stock from Global Net Lease with a 6.875 percent cumulative dividend and raised about $86 million for the company. This is GNL’s second preferred stock currently trading and is unrated. GNL is a $1.8 billion property REIT, specializing in office buildings. The company currently has outstanding offers to purchase fifteen properties for approximately $104 million toward which the proceeds of the new GBLNP/GNL-B will go.

FTABP/FTAI-B is an 8 percent traditional preferred stock from Fortress Transportation Infrastructure Investors LLC paying cumulative dividends. FTABP/FTAI-B is the company’s second preferred stock, both of which were issued within the last 90 days. FTABP/FTAI-B uses the fixed-to-float dividend rate structure, paying 8 percent until the security’s December 15, 2024 call date. At that time, the dividend rate will float based on the three-month LIBOR rate plus 6.447 percent. Page S-13 of the prospectus describes how the coupon of this security will be calculated in the event the LIBOR becomes unavailable. FTAI is a $1.5 billion company founded in 2011 and “…owns and acquires infrastructure and related equipment for the transportation of goods and people in Africa, Asia, Europe, North America, and South America.”

Prospectuses: SACC, PSA-J, ALL-I, SYF-A, CIT-B, CODI-C, BXS-A, AEL-A, MS-L, AXQEL/EQH-A, GBLNP/GNL-B, FTABP/FTAI-B

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 (rather than ETDS) 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 LLC’s – at least 90 percent of a REIT’s taxable 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 up to twenty percent deductible. Such income is reported to you on the 1099 form 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 (this double-taxation being a favorite political football every few years).

Unless specified otherwise, traditional preferred stock dividends, including those paid by partnerships, as pass-through income or are otherwise paid out of pre-tax profits, are taxable as regular income; you pay the full tax since the company has not (CODI-C, FTABP/FTAI-B).

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 (PSA-J, GBLNP/GNL-B).

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. 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 (SACC).

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 (ALL-I, SYF-A, CIT-B, BXS-A, AEL-A, MS-L, AXQEL/EQH-A).

In Context: The U.S. preferred stock marketplace

The following chart illustrates the average market price of U.S.-traded preferred stocks over the last 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 6.5 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.8 percent and that of the 2-year bank CD has turned the yield curve upside down at 2.2 percent.

For comparison, I have set the Yield column in the first table above to show the current yield of the new November preferreds on November 29. It is into this marketplace that November’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.