High Quality Preferreds Being Slammed

As the more seasoned preferred stock investors know when interest rates rise the preferred that are knocked down the most are the high quality, low coupon, perpetual issues.

We always watch the Public Storage (NYSE:PSA) preferred for hints at direction movement and the size of those moves in quality issues.  PSA has 13 preferreds outstanding with coupons ranging from a low of 4.90% to 6.375%.

Here is a chart of the PSA-D issue which carries a 4.95% coupon showing a 5 day loss of 3%.  This is exactly why many investors stay away from these low coupon issues at this stage of the interest rate cycle.




44 thoughts on “High Quality Preferreds Being Slammed”

  1. This is why I always say look for good quality that is slightly illiquid and above market yield and past call…I had to flip some of my HE-U as it went above 26.60 today so I sold some. Still kept majority of them though. I bought more NSS with proceeds. I still think this is a good play with the live floater occurring now. Only 22 cents above next exD payment end of this month and plus 10% current yield. Not a widows play, but this being subordinated debt held strong when NS and preferreds cratered earlier in year. And now it yields more than either despite sitting above in cap stack. Lets just say that doesn’t happen too much, but there is a reason.

    1. HI Grid–haven’t been back in NSS lately–waiting for a big unload somewhere.

      Had a big unload on KYN-F today so I picked up 500 shares around 25.

      1. I saw that Tim, and I gave it pause to get back in. But I can find 3% CDs with shorter duration, so I will sit….But certainly respect your purchase. Very possible this issue when it matures in 2 plus years gives one more income and capital returned combined than a 6% perpetual would. Give me another selloff at 24.76 when I jumped lastfor a nice quick flip, and I am back!

      2. Tim, I joined the KYN.F party, as it fills a nice short spot in my income ladder and it is extremely safe. Trying to transition part of my taxable income portfolio to be like my muni bonds; where I don’t think about it very often and know that income stream is short and secure while/if interest rates head higher. Wishing you profitable investing, Nomad

    2. Grid, did you mean plus 9% current yield? I bought some more GLP-A yesterday. Thinking of adding to my NSS shares. Any interest in CPE-A?

      1. MP, NSS now pays $2.64 which is current yield of 10.22%. This is considerably higher than the tradeable preferreds. I have flipped CPE-A off and on a few times when it would get near 25.80. One is going to see this thing stay outstanding 6 months to net anything. I cant fault anyone for going in as company may let it be awhile. Might be a good flip too. On their July debt issuance for an acquisition they stated they may redeem CPE-A with proceeds if acquisition was not consummated. It was completed though ..So its on their minds to redeem it. Whether they have the financial fire power to do so remains to be seen.

        1. I’m trying to understand the current yield calculation on NSS. I read that it now pays 3mL + 673.4bp. So an annual payment of $2.64 sounds high. And its trading at a premium. Any help is appreciated.

          1. Logic would indicate you all are correct. Probably best to go with that assumption. Odd that TD and CNBC are both wrong, but it wont be the first time. Since it went adjustable reporting has been sketchy for some sites…CNBC has been correct since it went adjustable. Maybe time for a mistake, lol.

          2. Thanks for helping out. I am relatively new to this, so I am trying to make sure I understand. Hopefully, after a while, I will have the intuitive understand Gridbird and Tim have. And it was a great call. I wish I made it.

          3. Ok guys, got off golf course and got to the bottom of this NSS thing…TD and CNBC computers were whacked out….Tim’s eyeball projection was real strong…Officially next interest payment is .5797 cents which annualizes out to $2.319. Present yield is 9.03% at todays closing price. So much for 10%, lol.. BTW, last quarterly payment was .5739 or annualizing out to $2.297. The book is now closed for this quarter.

    3. Dumped the rest of my HE-U. Made a $1.30 holding a bit over 3 months. Its YTM is uninspiring after climbing the 26.70 mark. On to something else. Will look for HE-U under 26 again in future.

  2. I’m nibbling now (SAF, ALL-G, CHSCL, JPMLL, AMH-D) with more GTC buy orders sitting at historic lows of a few others just in case we see some real panic selling.

    BTW, has the new DUK issue started trading?

  3. Looks like somebody got a rude surprise this morning buying a 100 shares of VERF without a limit order.I bet the seller was surprised too. 10.00 a share over normal price.

    1. Bob, what makes you think that the buyer doesn’t want the VERF to “seem” higher? There are many illiquid equities that are manipulated each day for various reasons. Time flies over us, but leaves it’s shadow behind, Nomad

  4. Hi Tim, Any thoughts on LTS.A? I have owned it in the past for a profitable trade and see it’s jumping around a lot. Price now is $22.73.

    1. Hi David–when it first came out I owned quite a bit of it–like monthly payers. I haven’t owned it for quite a while now. The older I get the more conservative I get–right now I wouldn’t own it–not because of the Dr Frost controversy–just because the financial continue to be fairly ‘dicey’. My suspicion is they will do ok, but it could be a wild ride. I would own the debt issues with the corresponding coupon reduction before I could do LTS-A now, although the debt is looking kind of sickly as well.

    2. I look at the parent (LTS) financials and see negative ROE, ROA and net margin from 2015 through TTM. I’m curious what makes you want to risk your money there.

  5. Guess it pays to set GTC SELL Limit orders at high prices on everything for those kind of events. I’ve had a few hit over the years – very satisfying.

  6. No one has ever explained to me why one should care about the share price. I buy preferreds at issuance for the income, and I hold them until they are called. If they are never called, that’s fine, that’s the deal I have made. And I am more than happy to buy additional shares if the price gets driven down.

    I would politely suggest that very few of us are like Gridbird, flipping small lots of obscure preferreds for a few pennies gain here and there. If I am wrong, please enlighten me.

    1. Larry, I have a decent sized portion of my portfolio that I flip illiquids in. This has been an incredible year for “flips”; I think the threat of and the reality of higher interest rates has helped many of the “flipping” community. Flip at your own risk, Nomad

      1. Yes, it has Nomad…I dont know about you but it has came in rainshowers then droughts…The FPI-B was a layup…Like $5 a share in one week hold…If I wasnt chicken I should have bought double what I did…Buying a preferred you know will bounce back from a hit piece, but dont want to hold long term. Get the money, get out.. I had some illiquids like WELPM where I bought at $113 on a sell off and flipped a month later at $119 and scalped the divi…So I got a years plus worth of divis in a months time. A lot of these happened at once then quit for a while….Or sometimes I actually dont look on my phone at the golf course and miss them, lol. Im trying to tone it down a bit and hunker down….Unless of course an opportunity presents itself for a quick easy money buck, lol.

    2. Zero wrong with being a buy and hold investor, of preferred or most other securities. But preferred markets are laden with inefficiencies that can be exploited. So, if you have the time and knowledge (it takes lots of both) you can juice your returns 100-200 basis points quite handily. And if you happen to enjoy it, so much the better.

      Personally, I am somewhere in between but I find no fault with either extreme.

      Just wish I could get Vanguard to add specific dates to the GTG order. Would make managing my order book much easier.

    3. Larry, that is certainly a personal choice as we all have different strategies. I do have some personal anchor preferreds that never get or rarely traded….But if you prefer buying above par and past call issues like I do, price entry point matters. And the “pennies” add up. This how I yearly grind largely 6% preferreds into 12% returns over the past several years (also benefitting from low interest rate periods also). I also find it interesting and entertaining. Take for example ASRVP if I had bought and held past few years my returns would have been largely the yield of 7.5%. Instead its been more than double holding a fraction of the time and investing proceeds for other flips. I stay in a roughly 50 preferred stock rotation… Another example this year was buying an illiquid at $140 and flipping it at over $180 a couple weeks later (a truly luck trade) But I have good online friends who love buying illiquids and just holding. I know one guy who bought a half million Connecticut Light and Power and Ameren preferreds to just buy and forever. He thanked me for routing him to those (they were bought cheaper a few years ago and he still holds). The 70-100 times dividend coverage and safety drawed him to those old ute preferreds. Definitely no right or wrong, I certainly am not advocating anyone to change what they do.

    4. Hi Larry–I care about share price as it scares me–plan and simple–to watch NAV evaporate even though I know the income will continue to be paid. This means right now I buy shorter maturity issues to get rid of some of the duration risk. It is really just a personal thing and I know Grid has a bunch of base issues in his portfolios and justs ‘flips’ around the edges for fun and profit.

  7. Hello Larry
    Flipping is just one of several strategies that different people employ. There is nothing right or wrong about any choice we make. I manage my PF in a manner similar to you but I will trade when I see a compelling reason to do so. I just don’t go looking for it.

    1. Jeff, that is a sound strategy too. Just for clarity, I started about 6 years ago buying only some utility preferreds, because I didnt trust anything to pay me. I assumed I was going to get ripped off somehow. I am a very distrustful person of the market. So I bought some decent slugs of AILLL and others of its ilk. I soon noticed they would spike up on lack of liquidity, and then return back to normal range after a sell off. So I noticed I could sell off on 40-50 cent spikes and then reenter at original purchase price before issue ever going exD. So I just progressed from there as this is mostly effective in illiquids. A more liquid example is people buying premarket issuances riding them up and then selling after they go on the exchanges to trade.

  8. Gridbird, I assume (presume) that your flips are are in non-taxable accounts. Is that correct ?
    Some MLP preferred stocks, such as NSS, may issue K-1s. A quick glance at Nustar’s inverstors info suggests they issue K-1s (but I may be wrong). If so, would MLP preferreds with K-1s be better suited for taxable accounts to avoid any mess with UBTI ?
    TIA !

    1. Aarod, Tim is correct no K-1, but that is a good question to know answer too. I am very limited in what I can trade K-1 because of UBTI, and the 1k limit per account. In fact I have only traded GLP-A and DCP-B that are K-1s. This alone has pretty much butted me close enough to the limits in my 2 accounts that I wont trade anymore K-1 this year. I assume all K-1 is UBTI even though that is wrong, but this way I dont have to worry and just throw K-1 in trash as I use my Roth and HSA to flip these. I largely am not a player here anyways, as I refuse to buy shippers (Mreits and BDCs also, just my preference) anyways. Generally have little interest in MLPs either.
      Remember any debt issue even if it comes from a K-1 company will not ever generate a K-1.

      1. Tim and Gridbird, many thanks for the useful info.
        I actually looked up NSS quickly on QOL and missed that it was a note. I will look in this site going forward as well … I still have much to learn.

        Gridbird, I respect what you expressed. A comment on shippers (just my opinion, which is less than two cents): they are not all of the same caliber.

        I’ve only invested in MLP shippers. IMO, analysts with a good track record on marine MLPs tend to scope them right. I hold HMLP-A and GLOP-B and wont lose sleep over them.

        I’ve invested in MLPs for ~ 12 years, including a few marine MLPs that issue a 1099 (e,g, HMLP and GLOP), though I’ve also held K-1 MLPs.

        Very appreciative for all your help.

        1. Aarod, its a personal decision, not a right or wrong one so dont question what you do on what I avoid. I avoid because I have seen how sharply they can drop and other factors such as over capacity and debt loads concern me. I dont think I am smart enough to get out in time if something would happen. Life is just simplier for me if I stay out of areas I dont feel comfortable in. I just like to largely stay in decent quality issues and buy and hold or flip just based on buy/sell imbalances. For example WELPM this summer…When it droped $10 in one hour, I knew it was just a sell imbalance and the company was fine. Because it has been fine for a 100 years.

        2. “IMO, analysts with a good track record on marine MLPs tend to scope them right.”

          My experience has been painfully different. I was a member of J. Mintzmyer’s service for one month and following his advice cost me a chunk of money. Of course, he didn’t hold a gun to my head and tell me to buy what I bought …. so I have nobody to blame but myself…..but I did buy what he recommended.

          1. Amy, many thanks for your reply. I’m sorry about your experience. It actually seems to corroborate the importance of quality information. I’ve also incurred SA scars and injuries through the course of time. Some of the authored SA stuff (IMO) may not be worth the ink. Some of the comments at times are better than the SA article.
            I did not know of Mintzmyer till now. I was primarily referring to analysts from the likes of Morgan Stanley, WF, BoA (ML), UBS, Stifel, Raymond J, Barclays. These analyst reports are not generally available but some of their pertinent info gets posted in the “MLPs” board of InvestorVillage dot com , as some of you likely know.
            Thanks again and BR

          2. Hi aarod,

            Thanks for your reply and clarification regarding the analysts that you were referring to. I do read IV on occasion but not ‘religiously’ like Tim’s site and SI. Too many chat boards…..so little time. :>)

    2. For what it’s worth ….

      Don’t put K-1 generators in a qualified account. The misery of going over the $1,000 UBTI limit is real. And these is no way to know in advance how much of a distribution will be UBTI. It can be 100%, and it can change year to year so last year’s distribution is no guarantee.

      There are much better things to put in a qualified account.

      1. Bob, I am certainly going to take your advise about UBTI nightmares. I am not going to find out!

  9. What happened? I was watching NNN-F, waiting for it to continue down into my buy range. It may be a weak preferred, but the company is strong and has been paying dividends for a _long_ time. Then all of a sudden this morning, it was up 1.5%! All the weak preferreds have stopped their slide!

    Was there some Fed signal I missed?

  10. Hi Bruce–no I think it is the typical react. It goes like this–people bail out quick because ‘rates are going higher’–kind of a small panic. Then rates stabilize and folks start to buy some deals.

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