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

[pb4uski]

^^^ I just don't think it is correct.

The Debevoise paper is for a different animal where the holder receives more shares because the issuer has the option to pay dividends in-kind (not in cash) or to pay dividends by increasing the liquidation value on existing shares (but no cash)... uncommon provisions for the preferred stock that many of us are buying... and is different from the question that you asked.... which was relating to undeclared dividends in arrears for cumulative preferred stock.

Many of us have the PCG cumulative preferred stock where dividends have been suspended so many years are undeclared and in arrears.... I found this on their website:

...Due to the dividend suspension of PG&E Corporation common stock and Pacific Gas and Electric Company preferred stock, effective December 20, 2017, no dividends were paid in 2018 or 2019; thus no 1099-DIV tax forms were issued for 2018 or 2019. ...

From the Debevoise paper:

The third way that phantom dividend income can be avoided - which also works whether or not the issuer has E&P – is to provide for an accumulating, compounding cash dividend that is payable only if it is declared by the board. Normally, a holder of preferred stock is not considered to receive a taxable dividend until the dividend is actually declared and paid by the issuing company. Even if dividends are allowed to accumulate and compound when not declared, the holder of the preferred stock generally is not considered to have current dividend income until the holder actually receives a cash dividend (or the preferred stock is exchanged for common stock). If the dividends are not actually paid in cash but are
instead added to the investor’s liquidation preference, the holder is generally in the same economic position as a holder of PIK preferred since the amount of common stock received
by the holder upon conversion of the preferred stock will typically be based on the increased liquidation preference.

Also a nit: technically they are not "accrued, but unpaid" because the obligating event for the issuer to accrue a preferred stock dividend is declaration by the board of directors... they are just dividends in arrears. IOW, no accounting by the issuer until the declaration occurs and then when the declaration occurs record preferred stock dividends and a corresonding accrued dividends liability.

 

[AtlasShrugged]

^^^ I just don't think it is correct.

The Debevoise paper is for a different animal where the holder receives more shares because the issuer has the option to pay dividends in-kind (not in cash) or to pay dividends by increasing the liquidation value on existing shares (but no cash)... uncommon provisions for the preferred stock that many of us are buying... and is different from the question that you asked.... which was relating to undeclared dividends in arrears for cumulative preferred stock.

Many of us have the PCG cumulative preferred stock where dividends have been suspended so many years are undeclared and in arrears.... I found this on their website:


From the Debevoise paper:



Also a nit: technically they are not "accrued, but unpaid" because the obligating event for the issuer to accrue a preferred stock dividend is declaration by the board of directors... they are just dividends in arrears. IOW, no accounting by the issuer until the declaration occurs and then when the declaration occurs record preferred stock dividends and a corresonding accrued dividends liability.

This all suggests that there is a possibility phantom income could apply under certain circumstances, but it is remote. Perhaps this explains why I had such a difficult time finding information pertaining to the problem. I think I'll punt on in it my paper since its not a mainstream consideration.

Thanks for your responses.

 

[pb4uski]

This all suggests that there is a possibility phantom income could apply under certain circumstances, but it is remote. ...

Yes.

 

[Mulligan]

PB, is correct. Preferred stocks in general trade “flat”. You pay taxes on any dividend received, not accrued. Notice I mean “Preferred Stock” in the true intent of the word. Capital stock...The word “Preferred Stock” has been conflated to include deferrable trust preferred stock which is actually subordinated debt, and deferrable baby bonds. Now these WILL have phantom taxes paid on them if payment is suspended.
An example is NSS for a baby bond... Now there are some more complicated trust issues like NYCB-U which DO cause phantom taxes to occur because it is an OID (Original Issue Discount) which has a convertible stock feature. One bypasses this issue of phantom taxes by these issues by holding in a tax free account.

 

[capjak]

Guess someone really wanted AILLL at 32 today.

 

[pb4uski]

Probably the person who bought on Apr 2 at the 52-week high of $45 scooping up a screaming deal at $32.

 

[Running_Man]

Mully,
What is your latest outlook on LAND-O and FPI-B. An interesting play on FPI even the common is the lease of land for Solar Credits. In the near future Solar Farms may become heavily subsidized and FPI already is into this, rents are 4X agricultural rent and therefore far more profitable.

 

[brokrken]

Sitting on the following gains and wondering if I should take them. Problem is what do I replace with?

PBI-B - 21%
MS-F - 23%
TBB - 10%
ATCO-G - 9%
RILYZ - 5%

Thoughts? Sell and try to flip back in lower later? Hold? Any good replacements?

 

[bobandsherry]

OTRKP - $24.08, down 2.5% today, only news I found is follow-up offering for shares at $24.75. This has a 9.5% coupon. Looked at common shares, down slightly today, 0.6%.

Seemed like a buying opportunity so snagged some shares $24.08 -- 9.8% yield - and QDI.

Ontrak Announces Pricing of Follow-On Offering of Non-Convertible Perpetual Preferred Stock

Ontrak, Inc. (NASDAQ: OTRK, OTRKP) ("Ontrak" or the "Company"), a leading AI-powered and telehealth enabled, virtualized healthcare company, today announced that it has priced its previously announced underwritten public offering of 1,730,000 shares of its 9.50% Series A Cumulative Perpetual Preferred Stock (the "Series A Preferred Stock") at $24.75 per share, for gross proceeds to the Company of approximately $42.8 million.

Dividend secure - using proceeds to set aside funds from proceeds to pay through August 2022:

The Company intends to use a portion of the net proceeds of the offering to fund a segregated dividend account for the payment of dividends on the Series A Preferred Stock through August 2022 and to use the remaining net proceeds for general corporate purposes, which may include working capital, M&A, and investments in technology.

 

[Mulligan]

Mully,
What is your latest outlook on LAND-O and FPI-B. An interesting play on FPI even the common is the lease of land for Solar Credits. In the near future Solar Farms may become heavily subsidized and FPI already is into this, rents are 4X agricultural rent and therefore far more profitable.

Hey RM, I was out of town, and couldnt log onto forum not knowing my password... Yes, actually I own both. I have owned FPI-B before a few times, but oddly just reentered buying 500 shares the day before exD at 25.29. Strangely its already higher already.
The issue “participates” in land value gains. So effectively its redemption price is now $25.80, not $25.
About 70% of the enterprise value of company is debt and preferreds (it also has a more onerous private placed issue) so not a lot of equity value, and they appear to be buying some of the common back their CEO said...Its hard to tell if entry point now is a good price though. Maybe it might deflate a bit, as it should have after exD but it didnt.
I also own LANDO. Probably the “safer” of the two company wise. But I like owning both now.
They tend to be opposites, one is more speciality crop, the other is more row crop. One (LAND) is externally managed and the other is internal managed.

 

[Mulligan]

Sitting on the following gains and wondering if I should take them. Problem is what do I replace with?

PBI-B - 21%
MS-F - 23%
TBB - 10%
ATCO-G - 9%
RILYZ - 5%

Thoughts? Sell and try to flip back in lower later? Hold? Any good replacements?

Ken, its hard to tell if you are wanting to stay fully invested as most have been pulled upward in general. Im just trying to goose returns slightly by rotating around a bit in like issues when they drop a small amount and another rises.
Sometimes I just trade and buy the same thing, ha. Take GJH for example which I want to keep. Last week I sold some off at 10.75 and repurchased same day at 10.50 average. Then after it went exD I sold some at 10.45 and rebought same day at $10.30. Hoping not to throw my back out picking up nickels, ha.
I tend to buy NYCB-U on quick dips to add. I bought 100 more today at $46.30. The market just loved NYCB-A and hates older sister NYCB-U, even though U has higher yield and sits above A in capital structure and payment. And is in effect cumulative while A is not.
Its all because of that phantom tax thing, but its 100% avoided just by owning in a tax free account.

 

[brokrken]

Thanks, Mully. I decided to hold on, although that PBI-B is still on the block for me. That company is sucking wind, so I still may bail at some point. Also picked up some NYCB-U, so thanks for the suggestion.

Also, Bob, thanks for the OTRKP idea, picked up a bit of those too.

 

[Mulligan]

Thanks, Mully. I decided to hold on, although that PBI-B is still on the block for me. That company is sucking wind, so I still may bail at some point. Also picked up some NYCB-U, so thanks for the suggestion.

Also, Bob, thanks for the OTRKP idea, picked up a bit of those too.

Ken, I just flipped out of PBI-B this week. But I think momentum is a bit on its side. I wouldnt be scared to own it again in my high risk bucket. The trend has been your friend on it so I dont see it a problem to let it ride.
If you are wanting a higher risk higher yield play, consider some SCCC which is a baby bond from a hard lending provider. They have been doing well lately. SCCC just dropped today because they reopened this issue at $24.75 this morning to sell more shares into the market.
I own a decent amount of this baby bond.

 

[pb4uski]

I had an issue called (USB-O) and am trying to re-deploy the proceeds. Looking at GAB-J. Rated A1 by Moody's as of 11/20/20... 5.24% yield at $26.01... 5.45% coupon.... callable since 3/31/21 so a little call risk.

Net assets were 369% of total preferreds at 6/30.

Thoughts? This would be my first CEF preferred but it seems like a good risk/reward value proposition overall.

 

[Mulligan]

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

I had an issue called (USB-O) and am trying to re-deploy the proceeds. Looking at GAB-J. Rated A1 by Moody's as of 11/20/20... 5.24% yield at $26.01... 5.45% coupon.... callable since 3/31/21 so a little call risk.

Net assets were 369% of total preferreds at 6/30.

Thoughts? This would be my first CEF preferred but it seems like a good risk/reward value proposition overall.

PB, I think you will be ok here. The actual issue will be very safe. A couple ways they can maneuver to keep asset coverage fine provided there ever was a need which is not likely. It was issued when 10 year was 1.8%.
It really traded very strong in March chaos, which is good mental comfort. Gabelli will redeem issues but typically isnt quick to do so.
So if rates rise a bit being its high quality and relative above market yield it shouldnt have a lot of near term pricing pressure. Ok course a quick hook redemption on initial call date would negate most returns, but sitting in the bank would net even less.
One thing that may or may not matter to you, is the apparent variable nature of the tax benefit. You would need to research that more if it was a concern to you.

 

[53anddone]

PB4 - A comparable option might be something like PPX. Also callable but not likely as its been callable since 2018. 5.9% coupon slightly lower rated but still investment grade I believe. Currently at $26.20 but coming from a utility a bit easier to understand. Just a thought.

I have been buying some of the smaller REITS below par lately. More risk but better rate.

 

[pb4uski]

I like that one. Thanks.

 

[aja8888]

I like that one. Thanks.

Pb, assuming you referred to PPX above:

(Food for thought. I'm no expert like Mulli is but this PPX has some hair on it.)

This is a Subordinated Note, not a preferred stock(?) It has some interesting risk factors. Here's a slice of them:

Risks Relating to the Notes

PPL Capital Funding can defer interest payments on the Notes for one or more periods of up to 10 years each. Any such deferral is likely to decrease the market price of the Notes.

So long as there is no event of default under the subordinated indenture pursuant to which the Notes will be issued, PPL Capital Funding may defer interest payments on the Notes, from time to time, for one or more Optional Deferral Periods of up to 10 consecutive years. At the end of an Optional Deferral Period, if all amounts due are paid, PPL Capital Funding could start a new Optional Deferral Period of up to 10 consecutive years per Optional Deferral Period. During any Optional Deferral Period, interest on the Notes would be deferred but would accrue additional interest at a rate equal to the interest rate on the Notes, compounded on each interest payment date, to the extent permitted by applicable law. No Optional Deferral Period may extend beyond the maturity date of the Notes. During an Optional Deferral Period, interest payments would not be due and payable and, therefore, PPL Corporation would not be obligated to make payments under the Subordinated Guarantees. If PPL Capital Funding exercises this interest deferral right, the market price of the Notes is likely to decrease. See “Description of the Notes—Option to Defer Interest Payments.”

If PPL Capital Funding exercises its right to defer interest payments, the Notes are likely to trade at a price that does not fully reflect the value of accrued but unpaid interest on the Notes or that is otherwise less than the price at which the Notes would have been traded if PPL Capital Funding had not exercised such right. In addition, as a result of PPL Capital Funding’s right to defer interest payments, the market price of the Notes may be more volatile than other securities that do not have these rights.

Ranking:

PPL Capital Funding’s payment obligation under the Notes will be unsecured and will rank junior and be subordinated in right of payment and upon liquidation to all of PPL Capital Funding’s Senior Indebtedness, and PPL Corporation’s payment obligation under the Subordinated Guarantees will be unsecured and will rank junior and be subordinated in right of payment and upon liquidation to all of PPL Corporation’s Senior Indebtedness.

 

[pb4uski]

aj, actually these baby bonds have more favorable provisions than preferred stock.

These baby bonds have a 10-year limit on non-payment of interest and holders would receive interest on unpaid interest, so they are favorable compared to cumulative preferred stock, which have no limitation on the period that dividends can be unpaid and no compounding of interest (just simple interest). The hit to price is no different than for similar preferred stock that suspends distributions... we have experience with this with PCG's preferred stocks (and others).

Also, baby bonds actually rank one step ahead of preferred stock... both are behind senior debt and both are unsecured.

So in short, they have a little less hair on them than their preferred stock cousins.

I think Mully will be along in a while but I'm pretty sure that I'm right on this.

 

[Mulligan]

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

This is just a personal opinion. I owned PPX off and on alot for several years. It was a great flipper after it would go exD it would drop in $25.20 range then I would sell around $26 before exD, rinse and repeat over and over.
But it is trading now like market has “forgot” its past call. It doesnt go exD for another month and is $1.20 over par.
Its par yield is way over what new issues of its ilk would pay now. But the other worry is they are looking to dump half their business (the U.K. Business) and have it for sale. This would deleverage company big time, so assumption would be to pay off a lot of debt with the cash from proceeds.... Or if this drags out they could redeem and reissue.
The safety of the issue in terms of payment is no concern to me, but call loss is what scares me off at over $26. The following sounds irrational (and it is), but if I was a long time holder of the issue for income only, I would probably just hold until they redeem... But if it was for a brand new purchase, I wouldnt for the above risk reasons of a call.
The reason my logic is irrational is because technically at market open one is “buying” their shares daily if they arent selling them.
PB, you are correct. They sit above preferred stock. They cannot suspend payment unless all preferreds and or dividends of common are suspended first.
The suspension is rarely used...Its really only there for credit agencies to count part of this debt as equity since it could be suspended without penalty or bankruptcy. So it makes (in credit agencies eyes) the ability to “hide” some debt on the equity side.

 

[pb4uski]

Yes, call risk is a difficult thing to judge. It's tempting to say... "well, I just won't buy anything significantly over par... problem solved"... but then that makes slim picking even slimmer.

 

[Coolius]

I have owned PPX for a while now, bought just a shade over par. So I'm comfortable sitting on this one until redemption or maturity, whichever comes first.


I agree with Mulligan that at its present price of $26.20, call risk is too high, and I would not be a buyer at this level unless I had great confidence it will not be called due to divesting of their UK assets.

 

[53anddone]

This is just a personal opinion. I owned PPX off and on alot for several years. It was a great flipper after it would go exD it would drop in $25.20 range then I would sell around $26 before exD, rinse and repeat over and over.
But it is trading now like market has “forgot” its past call. It doesnt go exD for another month and is $1.20 over par.
Its par yield is way over what new issues of its ilk would pay now. But the other worry is they are looking to dump half their business (the U.K. Business) and have it for sale. This would deleverage company big time, so assumption would be to pay off a lot of debt with the cash from proceeds.... Or if this drags out they could redeem and reissue.
The safety of the issue in terms of payment is no concern to me, but call loss is what scares me off at over $26. The following sounds irrational (and it is), but if I was a long time holder of the issue for income only, I would probably just hold until they redeem... But if it was for a brand new purchase, I wouldnt for the above risk reasons of a call.
The reason my logic is irrational is because technically at market open one is “buying” their shares daily if they arent selling them.
PB, you are correct. They sit above preferred stock. They cannot suspend payment unless all preferreds and or dividends of common are suspended first.
The suspension is rarely used...Its really only there for credit agencies to count part of this debt as equity since it could be suspended without penalty or bankruptcy. So it makes (in credit agencies eyes) the ability to “hide” some debt on the equity side.

I had forgotten about the UK sale. Brings up the call risk for sure.

 

[pb4uski]

Looking at the charts, PPX has had a really good run up since the last dividend, which increases the call risk so I think it will go on the watch list and I'll pull the trigger on it if it dips.

Meanwhile, GAB-J looks like a relatively better value as a long term hold all things considered.

 

[Mulligan]

Looking at the charts, PPX has had a really good run up since the last dividend, which increases the call risk so I think it will go on the watch list and I'll pull the trigger on it if it dips.

Meanwhile, GAB-J looks like a relatively better value as a long term hold all things considered.

I tend to trade more, to juice returns as I enjoy the “junkie action” of it all also...But I like your “relatively better value” comment, PB, and chuckled... Because since the market recovered, that really has been my entire trading angle. Nothing out there is absolute value, just relative and narrowly even in that mode. But its all I have, ha.
A few sneak out though, when the Seaspan 7.125% 2027 maturity issue that was delisted several months ago and finally had a ticker assigned to it the other day, I jumped on in $24 range and added a few hundred more at $24.50. Its back up to $25 now. It is not a sector I enjoy investing in though at all... But because of that “relative” word, I feel compelled to hold instead of a quick gain flip.