Seeking Alpha

New Preferred Stock IPOs, December 2019

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Includes: CUBB, CUBI, F, GAB, GGT, HTIA, MBNKP, MFIN, PSA, SVB, T, WRB, WRB.PF
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 December, offering an average annual coupon of 5.7 percent.

There are currently 122 high quality preferred stocks selling for an average price of $26.29 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 6.4 percent.

The average market price of U.S.-traded preferred stocks began 2019 at $23.45 per share and finished at $25.86, delivering an average capital gain of $2.41, or 10.3 percent, to preferred stock investors. Adding in the 7.2 percent that January 2019 buyers would have realized by year-end in dividend cash, 2019 was a spectacular year for preferred stock investors.

As the year came to an end, and after falling in November, the average market price of U.S.-traded preferred stocks bounced back up during December. During the month, the average market price of U.S.-traded preferred stocks increased by $0.16 per share. This price increase pushed down the average current yield to today’s buyers by 0.056 percent, now at 6.4 percent.

December’s new preferred stocks

December’s ten new preferred stocks are offering an average annual dividend (coupon) of 5.7 percent, an average current yield (which does not consider reinvested dividends or capital gain/loss) of 5.6 percent and an average Yield-To-Call (which does consider reinvested dividends and capital gain/loss) of 5.2 percent (using December 31 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 K preferred stock from Public Storage is “PSA-K” at TD Ameritrade (NASDAQ:AMTD), Google Finance and several others but this same security is “PSA.PR.K” at E*TRADE (NASDAQ:ETFC) and “PSA.PK” 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 122 high-quality preferred stocks selling for an average price of $26.29 (December 31), 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 920 of these securities trading on U.S. stock exchanges (including convertible preferred stocks).

About the new issues

SIVBP (SIVBP) from SVB Financial Group (SVB) offers a Moody’s investment grade rating and 5.25 percent non-cumulative dividends. If the security’s underwriters set the dividend rate correctly (5.25 percent in this case), a newly issued preferred will tend to trade for a market price very close to its par value ($25 per share here). Setting the coupon of a new income security is as much art as it is science, but every once in a while, the underwriters get it very wrong and SIVBP is probably such a case. SIVBP’s market price rocketed to nearly $26 within days of its introduction, implying that the underwriters probably set this security’s coupon rate too generously; buyers have been very willing to pay close to $26 to earn 5.25 percent from SIVBP. SIVBP is the company’s only preferred stock currently trading. SVB is a regional bank founded in 1983 and headquartered in Santa Clara, California.

WRB-F (WRB.PF) is an Exchange-Traded Debit Security from insurer W.R. Berkley (WRB), also referred to as a baby bond. ETDS are bonds recorded on the company’s books as debt (rather than as equity, as in the case of preferred stock). As debt, the obligation to pay the interest on these bonds is cumulative. As bonds, ETDS are often seen as having lower risk than the same company’s preferred stock shares. ETDS are very similar to preferred stocks and are often listed on brokerage statements as such. WRB-F is a double-investment grade ETDS paying 5.1 percent interest. WRB is using $250 million of the $350 million raised by WRB-F to repurchase the 6.75 percent Trust Originated Preferred Security from W. R. Berkley Capital Trust II, a separate entity. The trust, in turn, will use the $250 million received from WRB to redeem the TOPrS shares. WRB is a $13 billion property and casualty insurer founded in 1967.

HTIA (HTIA) is a traditional preferred stock from Healthcare Trust, Inc. Be careful not to confuse Healthcare Trust, Inc. with Healthcare Trust of America, Inc. While Healthcare Trust of America, Inc. is publicly traded under the symbol HTA, Healthcare Trust, Inc., the issuer of HTIA, is not publicly traded (even though their preferred stock, HTIA, is). HTI is a property REIT focused on acquiring healthcare-related facilities. HTIA is the company’s first and only preferred stock, offering 7.375 percent cumulative dividends. Cumulative dividends are viewed as lower risk than non-cumulative dividends since with cumulative dividends the issuing company still owes you the money in the event of a skipped payment (their obligation to you accumulates). In other words, while cumulative dividends can be ‘deferred,’ they cannot be ‘suspended’ (keywords that make a big difference in the prospectus of a preferred stock).

CUBB (CUBB) is an unrated ETDS from Customers Bancorp (CUBI) paying 5.375 percent interest. Be careful when using this symbol to get a quote. CUBB is a duplicate symbol, with some quoting services showing the price of China Water Affairs Group Ltd. for this symbol. CUBI has five income securities currently trading, with the new CUBB being an ETDS and the remaining four being traditional preferred stocks. The prospectus for CUBB does not describe any specific intent for the use of the $62 million in net proceeds from this security. However, it does say that CUBI “…may use a portion of the net proceeds to redeem shares of our preferred stock once they become redeemable.” The first such candidate would be CUBI-C, a 7.0 percent preferred stock that becomes callable on June 15, 2020. For a publicly traded regional bank, CUBI is relatively small with a $746 million market capitalization. The company operates 13 branches primarily throughout the northeastern United States.

T-A (T.PA) is a traditional preferred stock from AT&T (T) offering 5.0 percent cumulative dividends and speculative grade ratings from Moody’s and S&P (Ba1/BB+). AT&T has three income securities currently trading, the other two being Exchange-Traded Debt Securities. T-A is a fairly large issue at 48 million shares, raising about $1.2 billion for the company. AT&T’s two ETDS do not become callable for another couple of years so the prospectus declares that the proceeds from T-A will be used for ‘general corporate purposes.’ A 3 percent common stock buy-back, expenses related to fighting off the pending Sprint-TMobile merger (which has been a week away from happening for about three years) and preparations for 5G will likely see the lion’s share of the proceeds from this new preferred stock.

F-C (F.PC) is a 6.0 percent ETDS offered by Ford Motor Company (F), the company’s second ETDS currently trading, both of which were introduced during 2019. This security seemed to have had a hard time getting launched. The underwriters put up the $800 million to purchase these new shares from Ford on December 11. Understandably anxious to re-sell the new shares and get their cash back, underwriters typically start doing so within a few days, but that did not happen here; it seemed to take forever for the NYSE to assign the F-C symbol. The new shares started trading on the NYSE twelve days later. Further, as described under SIVBP above, part of the job of the underwriters is to do their market research and set the coupon rate at a point where retail buyers are willing to pay the new security’s par value for ($25 in this case). But when F-C began trading on December 23, it opened at $25.95 and has not traded below $26 since. The implication is that rather than F-C’s 6.0 percent coupon, the underwriters should have set the coupon closer to 5.7 percent. F-C offers an investment grade BBB S&P rating and is call-protected until December 1, 2024.

GAB-K (NYSE:GAB) is a traditional preferred stock from Gabelli Equity Trust (GAB) offering 5.0 percent cumulative dividends and an A1 investment grade rating from Moody’s. The proceeds from GAB-K’s 4 million shares were used to redeem all 3 million outstanding shares of GAB’s Series D preferred stock (5.875 percent) on December 26, the maneuver saving the company $656,250 per year in dividend expense. GAB is a closed-end fund investing “…in stocks of companies operating across diversified sectors. It invests in preferred stock, convertible or exchangeable securities, and warrants and rights. The fund primarily invests in value stocks of companies across market capitalizations.”

PSA-K (NYSE:PSA) is an 8 million share traditional preferred stock from Public Storage, Inc. (PSA) paying 4.75 percent cumulative dividends. PSA is using the proceeds from the new PSA-K to redeem all 7 million shares of PSA-A (5.875 percent) on December 30, saving the company about $2 million per year in dividend expense. With the introduction of PSA-K, Public Storage has thirteen preferred stock series currently trading. Public Storage is the highest-rated property REIT in the U.S. (A3/BBB+).

GGT-G (GGT.PG) is a traditional preferred stock from Gabelli Multimedia Trust (GGT) offering 5.125 percent cumulative dividends and an investment grade A2 rating from Moody’s. GGT is a mutual fund focused on equity investing in the telecommunications, media, publishing, and entertainment industries. The fund has two preferred stocks currently trading, both of which offer the same 5.125 percent dividend. GGT has a market cap of about $200 million. The fund was created in 1994 and is headquartered in Rye, New York.

MBNKP (MBNKP) is an unrated traditional preferred stock issued by Medallion Financial Corp. (MFIN) paying non-cumulative 8.0 percent dividends. Medallion Financial is a bit odd in that it is one of a relatively few “FDIC-Supervised Depository Institutions.” As such, you will not find a prospectus for this security at the SEC. You can, however, find a variety of financial and other information about MFIN at the FDIC under institution ID 57449. MFIN has two income securities currently trading with MFINL becoming callable on April 15, 2020. Without a prospectus, it is unknown (at least to me) whether or not the company will use the proceeds from the new 8.0 percent MBNKP to redeem the outstanding shares of the older 9.0 percent MFINL, but holders of MFINL shares should watch for a redemption notice. Having said that, MFINL shares are still trading well above their $25 par value, which they would not be doing if market participants felt that MFINL was going to be redeemed any time soon.

Sources: Preferred stock table: CDx3 Notification Service database. Prospectuses: SIVBP, WRB-F, HTIA, CUBB, T-A, F-C, GAB-K, PSA-K, GGT-G, (no prospectus for MBNKP)

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 LLCs – 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 (HTIA).

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-K).

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 (WRB-F, CUBB, F-C).

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 (SIVBP, T-A, GAB-K, GGT-G, MBNKP).

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 6.4 percent (blue line) while the annual return being offered to income investors by the 10-year treasury is 1.9 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 December preferreds on December 31. It is into this marketplace that December’s new issues were introduced.

Disclosure: I am/we are long T-A. 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.