Fixed-Rate Preferred Stocks - Complete Review

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?
• I do much more than just articles at Trade With Beta: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Introduction

After my last preview article at the end of March, there was a period when there were no public articles of mine. The last three months were filled with high volatility and low liquidity, as the fear of the expanding new coronavirus had reached its climax. For two months, there weren't any new preferred stock IPOs, and the outstanding ones had experienced a very severe period of panic selling. Things were so dynamic that huge arbitrages were formed between all fixed-income securities which then had returned to fair prices in hours, even in minutes. Today, all the tension has already evaporated, and the market seems to be returning back to "normal". In my first article of the month, 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 a total of 365 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 5.7B 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

So far, it seems that this will be "the year of COVID-19". Every single news, every single thing, is indirectly or directly linked to the new coronavirus, which spread rapidly across the whole world and literally stopped the world economy. At the moment, measures that have been taken to fight the virus are now being lifted, and the countries, including the U.S., are now in the so-called "reopening economy" phase. The Standard & Poor's 500 ETF is again over its $300 threshold, only about 10% below its all-time high. The main benchmark for all fixed-income issues, the iShares Preferred and Income Securities ETF, had lost more than one-third of its market capitalization during the massive sell-off in March, but after the April and May recovery, it is also below 10% of its level before the COVID-19 crisis. The most significant indicator for all fixed-income investors, the 10-year Treasury Note Yield (TNX), is staying low, at a rate of 0.67%, and it seems that it would be difficult to move from there by all the Federal Reserve incentives.

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 36 preferred stocks that pay a fixed distribution rate and bear a negative Yield-to-Call, which is almost the same number compared from the last article from the beginning of March. As a percentage, 10% of the fixed-rate preferred stocks carry a call risk.

1.1 Long Time No Call

Source: Author's database

1.2 Short Time No Call

Source: Author's database

1.3 The Full List:

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.

At the end of February, we were in a position, where there weren't any rated fixed-rate preferred stocks below $25. During the panic selling, things turned 18 degrees, leaving no preferred stock above PAR. Currently, only this group consists of 89 preferred stocks, 32 of which are rated. The average current yield of all fixed-rate preferred stocks, trading below their PAR with a current yield of between 5% and 8%, sits at 6.40% (5.87% for the rated ones).

Take a look at only those that are rated from S&P:

Source: Author's database

Now, I will separate these into two groups - these that pay a qualified dividend rate, and these that pay a not qualified dividend rate.

• Qualified:

Source: Author's database

• Not Qualified:

Source: Author's database

The full list of all rated issues:

Source: Author's database

3. Current Yield < 5%:

Source: Author's database

Currently, there are 8 investment-grade issues, trading below PAR, with a current yield of below 5%. By adding the 9 from the 5-8% group, we get a total of 17 investment-grade fixed-rate preferred stocks that trade below their par value. Otherwise, these are 17% of all investment-grade fixed-rate preferred stocks (97 issues). As regards to all rated fixed-rate preferred stocks (no matter what), 60 out of 172 (35%) are trading below PAR.

Here is the full list of the Section 3 preferreds:

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 preferred stocks. None of these stocks bears an investment-grade rating (EPR Properties' EPR-G is rated with a "BB", Triton Internationals' TRTN-A and TRTN-B with a B+, and iStar's preferred stocks with a "B" rating), and they have to bring a significant additional risk to have such yields in this lower yield environment. Also, please note that New York Mortgage Trust's NYMTP has its dividend suspended, together with the rest of NYMT's preferred stocks, as the company's focus on conserving capital during coronavirus crisis.

Qualified:

Source: Author's database

This group is currently trading at the average Current Yield of 8.51%. 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 8.67%. The full list:

Source: Author's database

5. Current Yield > 10%:

Source: Author's database

For a better view of the other stocks, I'll remove the issues with above 50% current yield. These are CBL-E, CBL-D, RHE-A, NM-H, NM-G, and CETXP.

Source: Author's database

COVID-19 has increased this group to one of the largest in the current preview. There are a total of 60 fixed-rate preferred stocks with a current yield of more than 10%, that are trading below their par value. In this 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 21 preferreds (1/4) have their distribution suspended. Take a look at the picture below that contains some more information about issues with a suspended dividend:

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, and SPG.PJ, which become callable in more than 6 years.

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 3.20% (compared to 4.13% from the beginning of March).

Not Qualified:

Source: Author's database

The not-qualified ones are sitting at an average Yield-to-Call of 3.85% (while the average YTC three months ago was 4.85%).

9. The Term Preferred Stocks By Years-to-Maturity and Yield-to-Maturity:

Source: Author's database

Currently, all preferred stocks with a stated maturity date are trading below their par value. Thus, their Yield-to-Worst will be their Yield-to-Maturity.

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 > 5.50% and YTC > 4.00%:

After all quality issues have returned to their level before the coronavirus sell-off, I'll try to find the best of them. Currently, there are 9 preferred stocks that pay a qualified fixed dividend rate, with Yield-to-Call of above 4.00% (it is the Yield-to-Worst of six of the stocks) and a Current Yield of above 5.50% (the YTW of three) at the same time.

Source: Author's database

Again, the full list:

Source: Author's database

11. Ex-Dividend Dates for June 2020:

Which fixed-rate preferred stocks are ex-dividend for the current month? 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.

12. A Look at Recent Redemptions:

There are 17 fixed-rate preferred stocks called for redemption since January 1, 2020. The average Nominal Yield of the group sits at 6.43%.

Source: Author's database

13. A Look at the Most Recent IPOs:

There are also 18 issues, issued for the same period, with an average Nominal Yield of 6.04%:

Source: Author's database

14. 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

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 how our small world of fixed-rate preferred stocks looks like on the first trading day of June. This is our first review in three months, during which the stock market was fulfilled with very high volatility. Now, the preferred stocks continue their recovery from the March sell-off, and the bigger part of the quality preferred stocks (these with an investment-grade rating) has returned to their previous highs. As we can see, there are only 9 investment-grade preferred stocks that pay a qualified dividend and have a YTC of more than 4%, while their Current Yield is above 5.50%. Of course, the crisis did not pass without sacrifices. REITs were one of the hardest hit companies, and many of them have deferred their common stock and preferred stock dividends. Overall, excluding REITs and the leveraged companies in general, everything starts to look "normally valued" to overvalued. Again, there comes a time when we have to pick the less overvalued ones.

Note: This article was originally published for our subscribers on 06/01/2020 and some figures and charts may not be entirely up to date.

Analyst’s Disclosure: I am/we are long SYF.PA. 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.

Comments

[Tberth4216]

excellent - thanks

[jbzw]

Thanks for your comprehensive review.

[1613abcd]

I do have many preferrds and I enjoyed reading your article.

[rbow]

the March crash was a great time for arbitrage. I was making trades left and right. Couldn't keep up with the falling prices but when they bounced back my profits showed up.
Then I sold off too much too soon and missed the last part of the rally.

[Wake up to Reality]

Very informative piece. One additional way to slice it might be to distinguish those issues that are cumulative vs. non-cumulative. Especially for the non-IG issuers.

Thanks for this info.

[mrichsq1]

Do you not cover the preferred stocks of CHS Inc.?

[materago]

Same question for me. I've owned CHSCM for years, pleased with its performance. Maybe he doesn't cover unrated preferreds?

[A Pragmatic Investor]

With this "180 degree turn" ...
There are numerous opportunities, with different risk levels as well.
Due diligence is required !

Currently concentrating on the areas associated with government help (mostly Fed buying).
I believe their is still room for improvement in the mortgage REIT's.

[velkov_v]

What's your opinion o er REIT preferreds in the long run? Do they have good risk reward ratio. I'm thinking about adding some in the "pension" fund, which one will you reccomend?

Also:
"turned 18 degrees" :)