Preferred Stock Investing-The Good , The Bad and The In Between 2021

[pb4uski]

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Originally Posted by Closet_Gamer Hi. Hope this is an OK sub-topic for this thread... Is there a way to calculate the effective duration of PFFD? I believe preferreds tend to perform like fixed income so rate volatility should impact preferred prices, yes? Setting aside the tax treatment of some choices I'm considering, I see the following durations: MLN: 8.94 VTEB: 5.26 SWAGX: 6.26 PFFD: This is relatively short term money I'm working with (1-3 years), so interest near-term interest rate moves are a real consideration. Thanks!

Actually, this also came up in the current Income Portfolio thread where I posted about preferreds. Below is the question and my response. I wonder if some of the other seasoned preferred investors who participate in this thread (Mulligan, Coolius, bobandsherry and others) have any insights as to why they don't seem in real life to me near as interest sensitive as one would think.

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Originally Posted by OldShooter I have seen your posts on this in the past. I have never looked at these but my understanding is that they are sort of like a bond with no maturity date. Won't your extra income get wiped out by the stocks' loss of value as rates rise? Just curious about your thinking.

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Originally Posted by pb4uski One would think so but they don't seem to be nearly as interest sensitive as you would think in real life.... and I'll admit that it is a bit of a mystery to me. I'll use JPM.PRD as an example. It was issued Sept 18, 2018 for $25 with a 5.75% rate and a $1.44 annual dividend... at the time the 10Y Treasury was ~3.0% and the 30Y Treasury was ~3.2%. From Sept 2018 until July 27, 2020, the 10Y Treasury yield fell ~2.5% to 0.55% and the 30Y Treasury fell ~1.8% to 1.2%. But JPM.PRD only increased to $27.92... dropping the yield from 5.75% to 5.16%.... a mere fraction of the drop in the treasury rates. From July 2020 to today, the 10Y Treasury yield increased to 1.64% and the 30Y Treasury increased to 2.37%. But JPM.PRD only dropped to $27.11... increasing the yield from 5.16% to 5.31%. Another example is IPLDP (Interstate Power & Light) a BBB rated issue with a 5.1% ($1.28) dividend issued in 2013. On 6/14/2014 it was trading at $25 and the 30Y Treasury was at 3.47% and the 10Y Treasury was at 2.65%. Today, it traded at $25.60 yielding 5.0% but the 30Y Treasury is at 2.37% and the 10Y Treasury is at 1.64%. With a 100bps reduction in interest rates between 2014 and now you would think that the price would have increased a lot more than 60c, but it hasn't.

[Mulligan]

Quote:

Originally Posted by pb4uski Actually, this also came up in the current Income Portfolio thread where I posted about preferreds. Below is the question and my response. I wonder if some of the other seasoned preferred investors who participate in this thread (Mulligan, Coolius, bobandsherry and others) have any insights as to why they don't seem in real life to me near as interest sensitive as one would think.

PB, It just depends. And also they are equities and are prone to equity behavior and not “bond like”. Such as last March when preferreds in general got pummeled do to various sell programs.
Ignoring volatility issues, rising rates will have an impact on issues. Sometimes the “expectation” of rising rates can cause sell offs more than the rates themselves.
But an issues, yield, credit quality, call status, etc all can factor in too.
Take DTB and DTJ... DTJ is around $25.07 and 5.375% par yield. DTB is a 4.375% par yield and trades at $25.24. On surface this makes no sense. But J just went past first call, while B is still call protected. This distorts pricing.
If long end jumped say 50 bps, B would drop a buck or two, while J would probably stay about where it is.
Other scenarios... Rising rates and a growing economy generally the low yield high quality issues drop harder than high yield. When economy sags, the high yielders face more pressure as their balance sheets are stressed more in economic downturns.
As a broad general rule IG preferreds tend to yield 200-400 basis points more than the 10 yr bond.

[Mulligan]

Quote:

Originally Posted by pb4uski Actually, this also came up in the current Income Portfolio thread where I posted about preferreds. Below is the question and my response. I wonder if some of the other seasoned preferred investors who participate in this thread (Mulligan, Coolius, bobandsherry and others) have any insights as to why they don't seem in real life to me near as interest sensitive as one would think.

I dont know anything about PFFD such as what it owns and how it runs the portfolio.

[youbet]

How about SPLP/PRA? I accumulated a significant number of shares between early January and mid-April. Now the price is heading up and I see I'm up about 12% as a STCG. Sell? (It's in an IRA.) That would give me almost two years of divs immediately and I could stop fretting about UBTI and whether it will impact me. OTOH, I notice that SPLP had a favorable earnings announcement and the common is soaring as well. Perhaps SPLP/PRA is headed higher, maybe up to PAR?

Comments?

[Coolius]

As Mulligan says, " pinned to par " preferreds past first call tend to have lower volatility than those call protected ones when rate worries hit.


I have been accumulating DTJ and RNR-E as these are all pinned to par and should not deviate much from their current price - but tradeoff is that they could be called at any time with 30 days notice.


MNR-C is likely going to be called in September, its first call date ( also the div payment date ) because of the proposed EQC buyout. So as long as I can buy MNR-C below par+1 div, I don't lose - however, definitely not a long term investment, so I have to remain on my toes to identify replacements when the call happens.

[pb4uski]

I own all three of those Coolius. Calls used to bother me but now I am much more aware of YTC when buying so calls don't bother me so much... other than having to then find another place for the money.

I've been limiting myself to ~500 shares per ticker for $25 par issues to limit my credit risk... I may have to re-evaluate that policy.

[Mulligan]

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Originally Posted by youbet How about SPLP/PRA? I accumulated a significant number of shares between early January and mid-April. Now the price is heading up and I see I'm up about 12% as a STCG. Sell? (It's in an IRA.) That would give me almost two years of divs immediately and I could stop fretting about UBTI and whether it will impact me. OTOH, I notice that SPLP had a favorable earnings announcement and the common is soaring as well. Perhaps SPLP/PRA is headed higher, maybe up to PAR? Comments?

Youbet you dont want my opinion because I locked in too early at around $22.25. I thought it would bounce down...It didnt, lol..

[Mulligan]

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Originally Posted by pb4uski I own all three of those Coolius. Calls used to bother me but now I am much more aware of YTC when buying so calls don't bother me so much... other than having to then find another place for the money. I've been limiting myself to ~500 shares per ticker for $25 par issues to limit my credit risk... I may have to re-evaluate that policy.

In general, I believe when preferreds are priced to premium and dont have a lot of upside in general, buying into the “pinned to par” issues provides the best downside capital protection from higher yields. Along same pinned to par vein I have done something I have never done before. I have really loaded up on IPWLK the past couple months when I can. I bought 100 more today at $103.65. I got about 600 shares which is a helluva lot for me. But basically its traded around $100 the past 10 years, and goes exD next month. I hold my call breath and use it as a hideout spot.

[Winemaker]

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Originally Posted by youbet How about SPLP/PRA? I accumulated a significant number of shares between early January and mid-April. Now the price is heading up and I see I'm up about 12% as a STCG. Sell? (It's in an IRA.) That would give me almost two years of divs immediately and I could stop fretting about UBTI and whether it will impact me. OTOH, I notice that SPLP had a favorable earnings announcement and the common is soaring as well. Perhaps SPLP/PRA is headed higher, maybe up to PAR? Comments?

I'm hanging with my SPLP/PRA, youbet. I have broken my own rule about limiting myself to ~$5000 worth of any issue. I'm well over $20,000k with an average cost of $20.88. yeah they gave one divvy in stock, but it's been cash for a while. I can't see them reneging on any part of their preferred shares, it is a easy way to keep debt/equity ratios intact for future borrowing. If they screw us preferred owners, their credibility goes south big time; and that screws their business model.

[bobandsherry]

Looks like the remainder of ALLY-A will be called. Ally has new issue coming:

https://www.sec.gov/Archives/edgar/d...7112d424b5.htm

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We anticipate receiving approximately $ in net proceeds from the sale of the Series C Preferred Stock, after the underwriters’ discount and estimated fees and expenses. We intend to use the net proceeds from this offering to redeem a portion of the Company’s 8.125% Fixed Rate/Floating Rate Trust Preferred Securities, Series 2 of GMAC Capital Trust I,

New issue going to be $1,000 par.

[Hamster]

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Originally Posted by bobandsherry Looks like the remainder of ALLY-A will be called.

There goes one of my largest positions with no good replacement in sight.

[KingOfTheCheapos]

I own CEQP- and its $0.0125 per share!
It is generally viewed as a very good thing for share holders to sign and I will.

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Originally Posted by bobandsherry I don't know who else holds a piece of CEQP-, but there's a "CONSENT SOLICITATION STATEMENT" filing on 5/17 relating to changes as one of the sponsors (First Reserve Fund) wants to exit. This would then trigger a change of control, so Crestwood is looking to change the terms of the preferred agreement to strike out the language relating to the exit of the sponsor / change of control. From the letter: https://www.sec.gov/Archives/edgar/d...751dpre14a.htm This was also in the letter and caught my eye..... it's fill in the blank as the amount of the consent fee, someone on another forum mention it was $0.125/preferred unit, or $1.25 per 100 block. Might be better to force them to exercise the change of control. It currently has a floor of $10, shares closed today at $9.11

[KingOfTheCheapos]

Hi

I made some good money investing in distressed prefs in 2020. By this I mean prefs trading well below their call price who had (or were likely to) suspend their dividend.

I invested in CEQP-, XAN (now ARC), BHR, DS, HT, NG, DCP who all recovered nicely are reinstating or not cutting their dividends.

A few are still waiting to reinstate their dividend: SOHO and PEI

But it looks like all these opportunities are gone. Any suggestions?

[Mulligan]

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Originally Posted by KingOfTheCheapos Hi I made some good money investing in distressed prefs in 2020. By this I mean prefs trading well below their call price who had (or were likely to) suspend their dividend. I invested in CEQP-, XAN (now ARC), BHR, DS, HT, NG, DCP who all recovered nicely are reinstating or not cutting their dividends. A few are still waiting to reinstate their dividend: SOHO and PEI But it looks like all these opportunities are gone. Any suggestions?

King, you look like a cap gainer player in preferreds. As you have correctly observed its the bottom of the barrel hitting on mall and hotel types that are left. Those few are out of my comfort zone.
Unless you are just a base income holder, the only way to make trade gains now is hitting IPOs right out of gate, or some divi capture plays and that is small gains compared to last years preferred sell off. Its tough out there to get what you are looking for at present time.

[Coolius]

Mulligan, I also own IPWLK, but far less than you.



Have you any concerns at all about the likelihood of a call? the call price is $100, so you could lose a couple of dollars should a call occur.


I have been toying with the idea of adding more, but the premium of about $3 over par gives me pause.

[Mulligan]

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Originally Posted by Coolius Mulligan, I also own IPWLK, but far less than you. Have you any concerns at all about the likelihood of a call? the call price is $100, so you could lose a couple of dollars should a call occur. I have been toying with the idea of adding more, but the premium of about $3 over par gives me pause.

See now this is where we are coming from different sides of the coin. You have been hit with a few call zingers and I have fortunately avoided any loss. So I am primed and fearless and emboldened from a great 5 months. I already flew over my 10% return goal this year, so I am willing to risk it for higher ute yield chase. Survive 4 months and your close to break even. I damn near just paid up to buy 100 more at $104.
But I snagged 100 shares of BANGN today and then traded into STAR-I at $25.60-63 today, so I doubt I buy more. I really own too much, but I dont care, I like risk reward, but that doesnt mean they wont be redeemed tomorrow at all. I can appreciate your concern. Maybe set a lower bid and if it hits it hits and if it dont you will be just fine without more!

[youbet]

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Originally Posted by Winemaker I'm hanging with my SPLP/PRA, youbet. I have broken my own rule about limiting myself to ~$5000 worth of any issue. I'm well over $20,000k with an average cost of $20.88. yeah they gave one divvy in stock, but it's been cash for a while. I can't see them reneging on any part of their preferred shares, it is a easy way to keep debt/equity ratios intact for future borrowing. If they screw us preferred owners, their credibility goes south big time; and that screws their business model.

That makes sense Winemaker. I'm up a bit over 12% and haven't owned it very long, so it's very tempting to take what amounts to two years of divs as a CG and go on my way. But it's so satisfying to watch the divs come in, I'll likely hold.

[Winemaker]

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Originally Posted by youbet That makes sense Winemaker. I'm up a bit over 12% and haven't owned it very long, so it's very tempting to take what amounts to two years of divs as a CG and go on my way. But it's so satisfying to watch the divs come in, I'll likely hold.

Watch your back, youbet, you might end up getting called a divvy payer buyer, or a rascal income investor!

[Coolius]

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Originally Posted by Mulligan Maybe set a lower bid and if it hits it hits and if it dont you will be just fine without more!

Yeah, that is what I have done. GTC order at $102.75. If it hits, great. If not, life goes on.

[Happyras]

OK, so anyone have details on DTJ being called? If it is prior to June 1, as in today, they payout at 102% plus accrued div. Or is there better detail on the call date?
BRIEF-DTE Energy Announces Redemption Of 2016 Series B 5.375% Junior Subordinated Debentures
BY Reuters
— 5:54 PM ET 05/27/2021
May 27 (Reuters) - DTE Energy Co ( DTE
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* DTE ENERGY ANNOUNCES REDEMPTION OF 2016 SERIES B 5.375% JUNIOR SUBORDINATED DEBENTURES Source text for Eikon: Further company coverage: