Barron's - USA (2020-10-19)

(Antfer) #1
26 BARRON’S October 19, 2020

stocks on the New York Stock Ex-


change and the Nasdaq market. Pre-


ferred dividends, like those on com-


mon shares, usually benefit from


preferential dividend tax treatment.


Preferred yields, while low, still


comfortably exceed the puny yields


on Treasuries. Reflecting the market’s


strength, the largest exchange-traded


fund for preferreds at $17 billion,


iShares Preferred & Income Secu-


rities(PFF), has rallied more than


50% from its March low, to $37. It


yields about 5%.


Modest net issuance has been met


with high investor demand. Since Sept.


1, about $5 billion of new preferred


and related securities have been is-


sued, but $4.25 billion has been re-


deemed.


“It’s a sellers’ market, and issuers are


taking advantage of it,” says Frank Si-


leo, a senior fixed-income strategist at


UBS. “Investors are hungry for yield.”


It has been the same situation for


much of the year. New preferred issu-


ance has totaled $47 billion in the first


nine months of 2020, but net new


issuance is only about $12 billion be-


cause of the redemption of high-rate


securities.


One sign of froth is thatPublic


Storage(PSA), the leading self-storage


real estate investment trust and a siz-


able preferred issuer, sold $250 million


of preferred at just 3.875% last month


in what could be the first sub-4%


fixed-rate issue. The yield was three-


quarters of a percentage point lower


than a deal in June from the company.


The 3.875% issue (PSA Pr N) now


trades close to its face value of $25.


Other recent issuers include insurer


W.R. Berkley(WRB), which issued


40-year exchange-traded subordinated


debt at 4.25% (WRB Pr G) and electric


utilityDTE Energy(DTE), which is-


sued 4.375% subordinated debt (DTB).


The subordinated debt deals trade like


preferred but pay interest, not divi-


dends, and thus lack tax benefits.


With the drop in rates, Nuveen’s


Baker says, there is more risk in pre-


ferred issues because they tend to be


perpetual securities, making their


prices acutely sensitive to higher


interest rates. Some investors have


pulled back from the market, viewing


the rate risk/reward as unappealing.


One negative with preferred stock is


that most issues are redeemable at face


value at the issuer’s option in five


years, limiting upside potential, while


the downside from higher rates and


credit problems is significant. If long-


term rates rise a percentage point,


some preferred could drop 10% or


more in price.


Preferred closed-end funds like the


Nuveen offering and theFirst Trust


Intermediate Duration Preferred


and Incomefund (FPF) invest beyond


preferred, in convertible securities and


debt and carry yields of around 7%,


reflecting leverage.


Baker likes a recent 5.7% preferred


issue from General Motors Financial,


the financing arm ofGeneral Motors


(GM). He cites GM’s strong balance


sheet and CEO Mary Barra’s “strategic


vision.” The GM Financial issue has 10


years of protection from early redemp-


tion, or a call, better than the typical


five years on bank deals. In 2030, the


GM Financial issue shifts to a floating


Prospecting


For Yield


In Preferreds


After a Rally


Attractive opportunities can still be


found among issuers like GE, Wells


Fargo, General Motors Financial,


and John Malone’s Qurate Retail


P


referred stocks have en-


joyed a strong rally since


the market lows in March,


reducing opportunities in


the $350 billion sector.


Most preferreds from the


leading issuers—the major


banks—now trade at premiums to


their face value, often resulting in


yields of 3% or less until the securities


are likely to be called for redemption in


the coming years.


With rates so low, investors have to


look further afield and take more risk


than they did in June, whenBarron’s


highlighted that many preferreds were


still yielding in the 5% range.


But investors can still find yields


of 4% to 8% on preferreds and related


securities. Issuers like General Motors


Financial,General Electric(ticker:


GE),Wells Fargo(WFC),Capital


One Financial(COF), and home-


shopping operatorQurate Retail


(QRTEA) offer opportunities.


“We think the market is still attrac-


tive,” says Douglas Baker, the head of


preferred investing at Nuveen, which


runs the $4 billionNuveen Preferred


Securities and Incomefund


(NPSAX) and several closed-end


funds, includingNuveen Preferred &


Income Securities(JPS).


Preferreds have long been popular


with retail investors because of their


relatively high yields, security (pre-


ferred is senior to common stock), and


liquidity. Many issues, especially those


with $25 face value, trade like common


By ANDREW BARY


Preferential Treatment


Here are five preferred issues and three funds that can help investors take advantage of the yields offered by

preferred stocks.

Issue / Symbol Recent Price Yield Credit Rating Moody’s / S&P

Capital One 4.625% / COF Pr K $24.64 4.7% Baa3 / BB


General Electric 5% debt 80.74 4.5 Baa3 / BBB-


General Motors Financial 5.7% 102.00 5.5 Ba2 / BB+


Qurate Retail 8% / QRTEP 99.19 8.1 Unrated


Wells Fargo 4.75% / WFC Pr Z 25.43 4.6 Baa2 / BB+


ETFs

Fund / Ticker Recent Price Yield Discount to Net Asset Value

iShares Preferred & Income Securities / PFF $36.90 5.1% NM


CLOSED-END FUNDS

Fund / Ticker Recent Price Yield Discount to Net Asset Value

Nuveen Preferred & Income Securities / JPS $9.00 6.7% 2.8%


First Trust Intermediate Duration 21.75 7.3 4.8


Preferred & Income / FPF


NM=Not Meaningful Source: Bloomberg Illustration by Bill Butcher
Free download pdf