Seeking Alpha

Fixed-Rate Preferred Stocks - Complete Review

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Includes: AHL.PD, CBL.PD, CBL.PE, CETXP, CTA.PA, DTLA.P, HOVNP, MAA.PI, MH.PA, MH.PC, MH.PD, MHLD, NM.PG, NM.PH, NMK.PB, NMK.PC, PCG, PFF, PRE.PH, RHE.PA, SF.PA, SPG.PJ, WVVIP, YGYIP
by: Arbitrage Trader
Arbitrage Trader
Arbitrage, debt, bonds, short-term horizon
Summary

We'll take a look at the main indicators that we follow and their behavior during the last month.

All the preferred stocks are sorted in categories.

What has changed over the last month?

Introduction

In this article, I review the most popular fixed-income securities, the fixed-rate preferred stocks, sorted into several categories. Something I post at the beginning of every month. There are 357 issues in our database that trade on primary exchanges, excluding the convertible preferred stocks, 58% 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, 37% of the PFF's market capitalization consists of fixed-rate preferred stocks, which corresponds to almost half of the fund's holdings. This means that we are talking around 6.3B 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

Source: TradingView.com

SPDR S&P 500 Trust ETF (SPY)

Source: TradingView.com

The most significant indicator for all fixed-income investors, the 10-year Treasury Note Yield (TNX), has declined from the 1.90% level for the third time since it has fallen below the 2% threshold in August. For the last 5 months, TNX seems to be in an uptrend after it hit its lowest rate at the start of September but failed to break through the resistance at 1.90%. Of course, this not come without the help of escalated tensions with Iran that send the bond market into a rally. The fixed-income securities, in turn, started the first day of December with tangible selling, that turned into a sharp buying afterward. As you can see in the second chart, the iShares Preferred and Income Securities ETF is up 3% for a month, reaching its summer 2018 levels, just before the mini-recession at the end of 2018. As for the equity markets, the S&P 500 continues to make a new all-time high almost every day since November, but it is currently experiencing a slight downtick due to the most recent news about the killing of Iranian major general, Qassim Soleimani, in an airstrike by U.S. helicopters at Baghdad's airport.

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. We can even see three securities that become callable after more than a year and already carry a call risk - PRE.PH, WVVIP, and SF.PA.

Overall, there are a total of 95(!) preferred stocks that pay a fixed distribution rate and bear a negative Yield-to-Call. Otherwise, these are a 1/4 of all examined securities. For reference, it is an increase with 26 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, its 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.

For the first month, there are none rated (excluding the PCG's preferred securities that carry a "D" S&P rating) fixed-rate preferred stocks in this group. You can see some more information about the issues above in the chart below:

Source: Author's database

3. Current Yield < 5%:

Source: Author's database

There are 7 securities in this section that their stripped price is below their par value, with a Current Yield of less than 5%. An interesting fact is that all of these preferred stocks are issued from about 70 years ago. Unlike these with a current yield of between 5% and 8%, all 7 are rated, as 2 have an investment-grade rating. In fact, CTA.PA and NMK.PB are the only two investment-grade fixed-rate preferred stocks that are trading below their par value. Take a look at the full list:

Source: Author's database

4. Current Yield Between 8% and 10%:

As in the previous 2 sections, 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 consists almost entirely 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 Nov. 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 8.94% (0.31% higher 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 8.78% (0.25% higher 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 10 of the 13 preferreds have their distribution suspended. These continue to be: RHE.PA, HOVNP, NM.PH, NM.PG, MHLD's preferred stocks (MH.PA, MH.PC, and MH.PD), and CETXP. Also, the CBL & Associates Properties' preferred stocks, CBL.PE and CBL.PD, must be added now, after the company suspended their dividends on December 2, 2019, after the trading session. 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 years to call and then an eloquent flattening to the 5 years to call. The reason why we can explain it in the lowering interest rates environment and the low yield new IPOs.

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 2.71%. (1.02% lower from the beginning of the previous month).

Not Qualified:

Source: Author's database

The not-qualified ones are sitting at an average Yield-to-Call of 3.09% (1.48% lower for a month).

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 > 4.00% and YTC > 4.00%:

With the current New Years' rally started back in December, it is quite hard 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 4.00% (it is the Yield-to-Worst of the stocks) and a Current Yield of above 4.00% at the same time.

Source: Author's database

Again, the full list:

Source: Author's database

11. mREIT Fixed Rate for IRA Accounts:

Source: Author's database

12. Ex-Dividend Dates for January 2020:

Which fixed-rate preferred stocks are ex-dividend for the first month of 2020? The date given is predicted on the basis 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.

13. A Look at Recent Redemptions:

There are 21 fixed-rate preferred stocks called for redemption since December 2019. The average Nominal Yield of the group sits at 6.32%.

Source: Author's database

14. A Look at the Most Recent IPOs:

There are also 6 issues, called for the same period, with an average Nominal Yield of 5.42%:

Source: Author's database

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

For a better view of the whole group, I'll exclude the three extremums, NMK.PC and CTA.PB that are the biggest gainers but having a PAR of $100, and OTC:YGYIP that is the biggest loser.

Source: Author's database

Now, for the newly received multitude, let's see the biggest winners and losers for the past 30 days:

  • Top Gainers:

Source: Author's database

  • Top Losers:

Source: Author's database

Conclusion

This is what our small world of fixed-rate preferred stocks look like at the start of the New Year 2020. When looking at pricing today, after the most recent rally in the fixed-income, it seems a very slow year impends for the buy-and-hold fixed-income investors. I don't see any Alpha in holding the average fixed income portfolio. Just look at the call risk issues, 1/4 of all can take the unpleasant surprise of an instant capital loss. And it's not hypothetical. More and more issues are getting redeemed and new around 5% and below-5% come out. For the last month, the spread between the new IPOs and the called ones is 0.90%. If we take a look at the Yield curve of the investment-grade fixed-rate preferred stocks, a shift of more than 1% for a month stands out. There are almost none investment-grade issues that are trading below their par value. Currently, these seem to be only 2. When we started 2019, there were 5-6 points of capital appreciation ahead in most of the stocks. The most I see today in 10-20 instruments is 20-30 cents if the rally in fixed income continues. Even if yields continue to lower the capital appreciation left on such an event is very limited due to the recent call dates of many of the issues. My strategy in such times is not to use my entire buying power so that I can short if needed.

Note: This article was originally published for our subscribers on 01/06/2020 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.