Preferred Stock Investing-The Good , The Bad and The In Between 2015 - 2020

[Mulligan]

Thanks. I don’t know enough to actively trade preferreds so really focus on companies I have confidence in that provide what I view as a nice risk adjusted yield.

Years ago I bought BAC and WFC preferreds. Both above par but good yield. They probably went up Close to 20% but are now worth less than I paid.

No real interest in selling because I still like the yield.

At some point maybe I will find that cumulative perpetual with a highly rated company at a nice yield during all this market turmoil. ... but for the most part I feel very outgunned by all the really smart people who know this space far better than I ever will.

Beach, screw BAC or WFC, if you want safety....Look at CBKLP...Now google 50 safest banks in the world..Only 3 are US...And you probably dont know any because they are all quasi ag coop banks in which Co Bank is one. Trading at $91... 6.125% par $100 past call.

 

[capjak]

It really just comes down to analyzing what you want, the safety level you want and making sure you arent overpaying in terms of current and historical pricing.
Then you just hold for income if that is its purpose. And ultimately that is it for me too. The trading is around the edges and added spice...Some can be quit simple...KTH... Buy at 29.50 your looking at over 6.3% maturity in 2028... non callable, 27.10 redemption price split A3/BBB- rating...PEco Energy subordinated debt issued in 1998 is held inside the trust of KTH. PA biggest utility...Do you like 6.3% IG? Do you like a mandatory maturity? If you like the company and the price and buy and forget about it.

KTH is not qualified Div. Co Bank is Qualified Div. if in taxable CoBank looks good.

 

[brokrken]

YTM on LANDP is near 17% at this level. I think I may bite. Any thoughts from the group?

Farmland isn't a bad place to be right now

 

[Mulligan]

YTM on LANDP is near 17% at this level. I think I may bite. Any thoughts from the group?

Farmland isn't a bad place to be right now

I bought 500 yesterday at 21.75.

 

[Mulligan]

KTH is not qualified Div. Co Bank is Qualified Div. if in taxable CoBank looks good.

Cap its not qualified because it is interest debt. Debt is never qualified and sits above in cap stack.

 

[brokrken]

I bought 500 yesterday at 21.75.

Looks like I just missed it. My $22 bid has no bites. Will keep trying

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

Looks like I just missed it. My $22 bid has no bites. Will keep trying

Remember Ken though they will want too I suspect, they are under no obligation to redeem this next year. Its such a tiny float relative to their other preferreds LANDB and LANDC which are 100 million plus issuances it shouldnt be a problem.

 

[brokrken]

Remember Ken though they will want too I suspect, they are under no obligation to redeem this next year. Its such a tiny float relative to their other preferreds LANDB and LANDC which are 100 million plus issuances it shouldnt be a problem.

Is 9/30/21 not the maturity date?

 

[bobandsherry]

Is 9/30/21 not the maturity date?

That's my understanding Ken. Seems like they have to redeem unless there's something hidden within the filing.

I'm on the bubble with this issue. Part of me says 16% is nice return for 18 months. But by the time I went to look it was already near $23 and that would give "only" about 13%. If economy turns around, could see some other issues flying higher. It's on my radar now to watch for a drop, maybe I'll put a bottom feeder GTC on this one.

 

[bobandsherry]

Beach, screw BAC or WFC, if you want safety....Look at CBKLP...Now google 50 safest banks in the world..Only 3 are US...And you probably dont know any because they are all quasi ag coop banks in which Co Bank is one. Trading at $91... 6.125% par $100 past call.

Thanks for the reminder on CBKLP. I snagged a few shares today at just under $90.

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

Is 9/30/21 not the maturity date?

No it is not a mandatory redemption but a penalty increase if they dont....

If the issuer fail to redeem or call for redemption the Preferred Stock pursuant to the mandatory redemption required on 9/30/2021, the dividend rate on the Preferred Stock will increase by 3.0% per share per annum to 9.375%, until such shares are redeemed or called for redemption. If a Change of Control Triggering Event occurs, unless the issuer has exercised their option to redeem the Preferred Stock, holders of the shares may require the issuer to redeem the Preferred Stock (see prospectus for further details).
I sold into this income comeback rally yesterday and this morning and dumped about a third of my stash this morning on my phone while golfing...Totally impossible to liquidate all and really dont want to...But I need cash in case something drops. Dont like sentiment at all.After being down 15% Im down around 6% it looks like now, through constant flipping and trading movements. It kinda pissed me off, not panic. A lot of my stuff is mental comfort term dated issues such as KTN, KTH, ASRVP, CNIGO. Then I got a few illiquids and a couple others like LANDP, Keeping the CBLKP also.

 

[bobandsherry]

Once again Mulli, you are plugged into the details. Not sure if the kicker makes the rate worth definitely worth redeeming or not, but sure seems like it's rich. Stay safe.

 

[Running_Man]

Mully, RM said

I don't disagree the first part that with the financial stress that some preferreds may not pay when due and some non-cumulative issues may even skip one of more payments... that is sensible.

My response was with respect to the second sentence. Any missed payments will be because the issuer doesn't have the financial strength to make the payments... noting to do with the good for the country or any government intervention or such rubbish. Get it now?

You are not understanding the present circumstance at all. There is already talk of putting severe restrictions on companies that take any financial help (read loans backed by feds) the president has already stated he is not opposed to blocking stock buybacks or issuing options by any company that takes a loan.

https://www.washingtonpost.com/business/on-small-business/trump-says-us-bailouts-may-require-equity-stakes-buyback-bans/2020/03/19/d3fee59a-6a01-11ea-b199-3a9799c54512_story.html

in 2008 19 banks were prohibited from paying dividends that received TARP moneyhttps://www.ft.com/content/130d27a0-348e-11e0-9ebc-00144feabdc0

Financial help this time is going to be TRILLIONS to corporations of every size. The Federal Deficit is going to be huge and cash flow generated as a result of the bailouts that are coming will result in stringent laws being passed down the line. ESPECIALLY for any bank, real estate, financing or energy preferred that takes government money.

I realize the rolling issues that are going to arrive as a result of a complete halt of the economy are not clear at this time, the financing aspects will come into play after they get through the GDP turmoil and to avoid future pain, government is going to have to show these loans were not bad and it will take 1st shot at future cash flows of the companies that are paid these loans I am presuming. The worst GDP drop in history is 12.3% in 1932, GOLDMAN is estimating a 24% drop in Q2, largest ever in American history. I am just planning for the logical impacts that are going to occur from the largest drop in GDP when corporate debt was already at it’s highest point of debt to GDP in history.

The country is facing an increase in debt and a drop in GDP, money to pay for that must come from somewhere and preferred dividends come from the most indebted companies in the United States in general.

Utility index got crushed on Friday and should be a concern to everyone, some very good utility stocks got obliterated, Spire went down 10% TO 63. IDA one of my favorites is down to 74 from a peak of 112. WEC dropped 18% Friday alone to 74. The HYG fell amounts not seen since 2008, these are all signs of an extreme debt crisis that is about to hit and the FED and loans will have to be trillions.

I do not have the ability to dance in and out of issues like Mully does and need a longer term horizon, so I plan based on what I feel are likely dominos that will fall into each other as a result of financial conditions and how one domino falling over will affect the next. I am quite happy to be wrong, but if I am wrong know I am just fine. However there are 22.4 Trillion in pension assets in the United States. The single biggest fixed income piece for these pensions is leveraged corporate debt.

As of the end of February the pension funding gap fell to 18% of assets. That will be over 25% by the end of March maybe approaching 30%. And that is just the average. There will not be financial room for companies that take relief money from the FEDS, which most conmpanies that pay preferreds will do, to allow preferred dividends, they will be subordinate to the FEDERAL debt, which will be used to backstop corporate debt, which supports the pension funds. To me it just seems a logical flow.

https://www.cnbc.com/2020/03/19/coronavirus-updates-senate-republicans-to-release-relief-bill.html

Edit: Just saw this in the proposal for the payments to indiviudals one rule will be no raises for any executives making more than 425K and the Federal Government has the “right” to participate in any gains the company taking the money makes. And this is the preliminary workings…...

 

[pb4uski]

I suspect that you are right that companies receiving bailouts will have restrictions on payment of common stock dividends, stock buybacks, executive compensation, stock options and the like.... and it might be as bad as it gets.

I just don't think that you are right that there will be restrictions on preferred dividends.. I think preferred shareholders will be treated pari passu with bondholders.

Besides, under the TARP program the capital infusions were preferred shares... do you seriously think the preferred shares owned by the government would come ahead of preferred shares owned by the public? You can check into it but I doubt that preferred shares of banks receiving TARP money were prohibited from paying preferred dividends, but they were prohibited from paying common dividends. Muligan or some of the others who owned bank preferreds back then might know.

You do understand that preferred dividends and common dividends are different, right?

 

[Running_Man]

I suspect that you are right that companies receiving bailouts will have restrictions on payment of common stock dividends, stock buybacks, executive compensation, stock options and the like.... and it might be as bad as it gets.

I just don't think that you are right that there will be restrictions on preferred dividends.. I think preferred shareholders will be treated pari passu with bondholders.

Besides, under the TARP program the capital infusions were preferred shares... do you seriously think the preferred shares owned by the government would come ahead of preferred shares owned by the public? You can check into it but I doubt that preferred shares of banks receiving TARP money were prohibited from paying preferred dividends, but they were prohibited from paying common dividends. Muligan or some of the others who owned bank preferreds back then might know.

You do understand that preferred dividends and common dividends are different, right?

Yes I know they are different and I know that preferred dividends were not restricted, we are at 5-10 times the level of financing needed for 2008. We are at the early stages, once the preferred shares fall, the ability to restrict payments for a period of years will be far easier to enforce while the loans are repaid. At some point down the line the dividends will be restarted and that will be when preferreds will be the best possible investment. I strongly reccomend reading The Great Depression by Benjamin Roth, to get an idea of what will happen to financial securities, and now we are in an era where it is expected for governments to take extraordinary measures for the common man.

 

[pb4uski]

Do you have a single historical precedent of where a company receiving government assistance has been prohibited from paying preferred dividends in the history of man?

 

[Mulligan]

Preferred Stock Investing-The Good , The Bad and The In Between

You are not understanding the present circumstance at all. There is already talk of putting severe restrictions on companies that take any financial help (read loans backed by feds) the president has already stated he is not opposed to blocking stock buybacks or issuing options by any company that takes a loan.

https://www.washingtonpost.com/busi...fee59a-6a01-11ea-b199-3a9799c54512_story.html

in 2008 19 banks were prohibited from paying dividends that received TARP moneyhttps://www.ft.com/content/130d27a0-348e-11e0-9ebc-00144feabdc0

Financial help this time is going to be TRILLIONS to corporations of every size. The Federal Deficit is going to be huge and cash flow generated as a result of the bailouts that are coming will result in stringent laws being passed down the line. ESPECIALLY for any bank, real estate, financing or energy preferred that takes government money.

I realize the rolling issues that are going to arrive as a result of a complete halt of the economy are not clear at this time, the financing aspects will come into play after they get through the GDP turmoil and to avoid future pain, government is going to have to show these loans were not bad and it will take 1st shot at future cash flows of the companies that are paid these loans I am presuming. The worst GDP drop in history is 12.3% in 1932, GOLDMAN is estimating a 24% drop in Q2, largest ever in American history. I am just planning for the logical impacts that are going to occur from the largest drop in GDP when corporate debt was already at it’s highest point of debt to GDP in history.

The country is facing an increase in debt and a drop in GDP, money to pay for that must come from somewhere and preferred dividends come from the most indebted companies in the United States in general.

Utility index got crushed on Friday and should be a concern to everyone, some very good utility stocks got obliterated, Spire went down 10% TO 63. IDA one of my favorites is down to 74 from a peak of 112. WEC dropped 18% Friday alone to 74. The HYG fell amounts not seen since 2008, these are all signs of an extreme debt crisis that is about to hit and the FED and loans will have to be trillions.

I do not have the ability to dance in and out of issues like Mully does and need a longer term horizon, so I plan based on what I feel are likely dominos that will fall into each other as a result of financial conditions and how one domino falling over will affect the next. I am quite happy to be wrong, but if I am wrong know I am just fine. However there are 22.4 Trillion in pension assets in the United States. The single biggest fixed income piece for these pensions is leveraged corporate debt.

As of the end of February the pension funding gap fell to 18% of assets. That will be over 25% by the end of March maybe approaching 30%. And that is just the average. There will not be financial room for companies that take relief money from the FEDS, which most conmpanies that pay preferreds will do, to allow preferred dividends, they will be subordinate to the FEDERAL debt, which will be used to backstop corporate debt, which supports the pension funds. To me it just seems a logical flow.

https://www.cnbc.com/2020/03/19/coronavirus-updates-senate-republicans-to-release-relief-bill.html

Edit: Just saw this in the proposal for the payments to indiviudals one rule will be no raises for any executives making more than 425K and the Federal Government has the “right” to participate in any gains the company taking the money makes. And this is the preliminary workings…...

RM and PB...My useless random thoughts...Everything is context though...Spire had a bad day, but over past week was down 5% while Dow was down 17%.
But RM is posting valid concerns of roll downs.. There has been concern on moratorium on companies and people to having to pay ute bills to keep power on. That could effect immediate liquidity of utilities also.
Liquidity and access to cash is very important for most companies now long story short...You see how quickly things have fallen apart in airline sector...And Boeing is getting the double whammy also.
RM brings great points up and being election year no politician wants to show they are bailing companies out to help fat cats and investors. They will want it presented as saving jobs for the common man. There is a lot of stigma from the 08-09 crisis that may make arrangements tighter this time around.
If memory serves market went down 90% in Great Depression. So there is down side. But its still early in the game and some medical discovery to mitigate side effects or advancement of a promising vaccine notice could catch someone offsides on a short in a violent manner also.
PB, in general times based on what I am interpreting, I think you are giving the protections of preferreds to much respect. These are not bonds and there is no contractual obligation to pay...ever...Hell one Brookfield reit outfit out of LA has had the preferred dividend suspended for over TEN years now.
As far as TARP goes, this is the genesis why you see non cumulative preferreds being issued now and no bank trust debt or cumulative preferreds allowed anymore. The govt doesnt want to bail out preferreds and debt holders anymore on banks in crisis. They want the investor to eat it this time.
In times of liquidity crisis cash preservation is king.Suspending preferreds are an excellent way to preserve cash if their is no access to it or the company is in crisis.
Things dont happen in a vacuum. RLJ slashed the common to a penny and yet declared the preferred dividend at same time. RLJ-A still crashed hard down 50% despite next payment. Why? Because that razor thin line between common and preferred just got thinner and market knows what the next step will be if needed.
I have culled my heard but still own. Take KTH. Ok if PECO gets a cash crunch near term and defers interest payment, it is what it is. I dont need the money. Im just largely betting PA biggest utility doesnt go bankrupt with A rated senior unsecured credit. I will take that chance...Pay me now or pay me in 2025 when deferment limit is reached, and then pay me it all back plus principal in 2028.

 

[thepalmersinking]

Palmer its about a way a company has to or desires to capitalize themselves. Banks are not allowed to use debt for Tier 1 capital any more. 2008-09 took care of that problem, ha.
Preferreds are capital not debt. On utility side there are many reasons why companies choose to. Remember the regulators approve their capital plans and then allow a rate of return off that. Once they are imbedded into capital plan it really doesnt matter as the customer pays for it anyways. Utilities are slow to redeem issues because any savings goes back to customer on next rate request. But they arent allowed to leave onerous high yields outstanding either as that is viewed as wasteful by regulators. Over a 20 years the preferred will be infinitely cheaper for company than a common stock share as dividends usually keep growing. Spire just raised common 5% last quarter as an example.

Thank you! Great answer

 

[Mulligan]

Do you have a single historical precedent of where a company receiving government assistance has been prohibited from paying preferred dividends in the history of man?

PB, I suspect it happened frequently. As a modified example take OSBCP that was recently redeemed this past month..Old Second Bank was going under..It got TARP assistance. OSBCP was suspended for the maximum 5 years and then repaid. But it was trust debt that is now disallowed for banks. If OSBC had a non cumulative preferred, one wouldnt have received a divi for years.
Look at the Fannie Mae bailout in crisis. Feds stepped in on bail out. Fannie Mae stock still trades and its zillions of preferreds. But neither stock or preferred has received a penny since. The govt keeps taking all the billions of profits directly to the treasury instead of the shareholders. Once they got rooted in there they havent gotten out and lawsuits are still flying over it.

 

[pb4uski]

So for the Fannie Mae preferred and common shareholders it is no different than if Fannie Mae went bankrupt and the Fed stepped in and picked up the business... same substance but different form other than a glimmer of hope that it might someday arise from the grave. I was referring more about a going concern.

 

[Running_Man]

So for the Fannie Mae preferred and common shareholders it is no different than if Fannie Mae went bankrupt and the Fed stepped in and picked up the business... same substance but different form other than a glimmer of hope that it might someday arise from the grave. I was referring more about a going concern.

Once companies take money from the feds they will not be a going concern they are a concern to keep going to repay the debt.

Any company that does not take money ala TARP will be a much better preferred, I have no idea of what companies those would be other than Public Storage, maybe Bunge and a few strong utilities. The ones that pay straight through would be the ones to pick up on a strong downturn (this downturn has been nothing so far) I am hopeful that if this does result in a much stronger financial recession, that this thread will be a source of where to pick up some great deals, I have all of my investing cash right now in US treasuries. Obviously that is not a long term solution but it is a highly flexible solution for me. As people get laid off there is also sure to be some cashing in of 401K in order to have money to live on and that will include redemptions of many retire 2040-2050 types that is going to put large pressure on the market and many of the furloughs are just beginning.

 

[Mulligan]

Once companies take money from the feds they will not be a going concern they are a concern to keep going to repay the debt.

Any company that does not take money ala TARP will be a much better preferred, I have no idea of what companies those would be other than Public Storage, maybe Bunge and a few strong utilities. The ones that pay straight through would be the ones to pick up on a strong downturn (this downturn has been nothing so far) I am hopeful that if this does result in a much stronger financial recession, that this thread will be a source of where to pick up some great deals, I have all of my investing cash right now in US treasuries. Obviously that is not a long term solution but it is a highly flexible solution for me. As people get laid off there is also sure to be some cashing in of 401K in order to have money to live on and that will include redemptions of many retire 2040-2050 types that is going to put large pressure on the market and many of the furloughs are just beginning.

TARP, was a bit different animal than today though..Today its businesses needing begging for assistance..With TARP it was shoved down some bank and financial companies when they didnt even need it. I think Wells had to take some and said they didnt even want it...They always paid their preferreds during crisis. FISI received Tarp money and never once suspended their preferred dividend payment to shareholders either. So blanket statements either way cant really be made.
Keep in mind one could make a killing on preferreds or get wiped out in the panicked sector. Some have doubled off their lows in a matter of hours Thursday. That isnt the area I look to play in though,

 

[pb4uski]

+1 TARP was a much different animal. Hank Paulson didn't want the banks that needed TARP money to stick out like a sore thumb so he just told them that they all needed to take it ... and that is what they did.... he framed it in a way that let them know that they didn't have much choice.

 

[Freedom56]

My view on preferred shares from trading them for the past 7 years. The best strategy has been to buy them on these sell-offs and sell them when you have a gain. Never buy a preferred stock above par unless you are speculating that a fund or someone if going to buy it at a higher price. Only buy investment grade preferred shares of large money center banks. I never bought utility preferred shares as their yields were too low relative to risk. I found that buy and hold does not work when you have a relatively low liquidity and a monster size ETF (relative the size of the preferred market) that is always heavily shorted when the market goes to risk-off mode. This causes the type of panic selling that we have seen over the past two weeks. However many were selling just to raise cash as if the world is ending. I did multiple round trip trades of C-PS, COF-PF, COF-PH, and JPM-PH during the past two weeks and am not holding any at the moment. I watch two ETFs (PGX and PFF) for clues. IF those ETFs sell off on volume, it's a leading indicator that within 30 minutes they will be dumping their holdings. If they move up more than 2% in a day on volume, they are in buy mode. You have to ask yourself, why bother holding a preferred stock for a year to get a 6% coupon, when you can get a trading gain equivalent to 9 months of coupon or more. Just my thoughts.


Tread carefully in the universe of preferred stocks going forward. I wouldn't buy and hold until we get a bit more clarity in what the world will be like after the shutdown ends. We are in a recession now (everything is just about shut down). With the stimulus and some evidence of containment, we could see bear market counter-trend rally. However, the weak sectors before this crisis (energy, mall REITs, airlines, retail) will resume their downward slide and sectors such as Leisure and entertainment will take a long time to comeback. After the effects of the stimulus wears out, we will likely resume the downtrend. I wouldn't bottom fish in the cruise line sector.

 

[Mulligan]

Thanks for sharing Freedom. Certainly many ways to skin a cat, I certainly respect that! Up until Friday, I have been 100% in preferreds and have been over 10% annually every year since 2013. Im down 6% this year now but was down 15% Wednesday morning, and I aint done fighting yet to get back to the plus side, lol...But it hasnt been from buy and hold, but as a modified version mirroring a bit your strategy which has involved a lot of flipping on disjointed price movements.
I will push back in a bit in defense of utilities as about 75% of my money has always been in utility preferrds so I have been able to generate returns there. But mostly because my personal opinion is they are as a general rule safer than banks. No Ute needed a bailout in 2008-09 while hundreds of banks including money centers did or they were dead.
After all it isnt called Utilityrupt, its called BANKrupt.
Only 3 utes have went bankrupt since Great Depression...Public Service New Hampshire (3 Mile Island) El Paso Electric (nuke building financing fiasco) and Pacific Gas and Electric (twice). So that generally is why utes pay less because of their business model.
But there has been some nice recent volatility that created some great plus 7% ute baby bonds I exploited.