Don't Be Fooled By Preferreds Prices + 20% Weekend Discount

Summary

• Welcome to another blog post from Systematic Income.
• Investors who track preferred stock prices on the web may be missing the real valuation picture.
• We discuss the dynamic of preferreds prices using QRTEP which we continue to hold in our High Income Portfolio.
• Take a 2-week no-obligation trial of Systematic Income to explore our Income Portfolios and Investor Tools.

Welcome to another weekend blog post from Systematic Income in which we touch on how preferreds prices can give the wrong valuation picture. 

Many investors track the prices of preferred stocks on Google, Marketwatch or other web portals. Something to be aware of if you are charting preferreds prices on the web is that preferreds trade dirty (every time I hear preferreds trade flat I have to remind myself what that means – flat just means no additional accrued coupon is added when cash changes hands i.e. the accrued is already in the published price. Having traded bonds rather than preferreds I find the dirty/clean terminology more intuitive but as a definition flat = dirty if you need to write it on a post-it which I am tempted to do).

In any case, let’s say the price of the preferreds was $100 yesterday and is $100 again today (today not being an ex-div date). It’s tempting to think that the valuation of the preferred is the same today as it was yesterday (which would be the case with a standard institutional bond or a stock) but that’s not actually the case because the $100 contains an extra day’s of accrued – in other words, the preferreds actual valuation fell by the amount of the accrued from yesterday to today. The chart below illustrates this dynamic.

Long story short – it’s cheapened quite a bit here though not a ton more than the move in 10-year yields. In terms of pricing, BB- rated HY bonds are trading around 4% yield – QRTEP (BB- from Fitch) is more than 2x that. Of course, it’s possible that Fitch could be wrong to give it that rating but it can’t be that wrong – QRTEP is not a CDO after all. This does suggest that there is something to the story of insiders possibly overegging the yield and then hoovering it up.

While we’re talking about it QRTEP has a couple of other attractive features. First, if the issuer decides to call it before 2028 then they have to do it above par – not a massive likelihood but a nice to have. And secondly, there is a maturity date so a nice feature for those worried about the very high duration of perpetual preferreds. QRTEP has to be redeemed in 2031 unless the issuer goes bust.

We continue to hold QRTEP in our High Income Portfolio on the service.

Thanks for reading.

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