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Just to Be Clear on CHS

Back on 1/4/2024 I wrote on the CHS reset preferreds–that the coupons are to be fixed coupons in the future.

I had missed their official announcement on 1/10/2024 relative to this topic–my original position was confirmed. I had previously updated information on this site that they would be fixed.

As I suspected the change has made no difference in the share price.

From the 10-Q filed 1/10/2024.

On January 2, 2024, per the terms of our Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2 and Series 3, and the Adjustable Interest Rate (LIBOR) Act, the stated rates of 7.10% and 6.75%, respectively, were fixed at 7.10% and 6.75% (the “Fixed Rates”), respectively. We will pay dividends on Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 2 after March 31, 2024, and on Class B Reset Rate Cumulative Redeemable Preferred Stock, Series 3 after September 30, 2024, at the Fixed Rates until they are redeemed.

15 thoughts on “Just to Be Clear on CHS”

  1. I’d like to try to understand better why the CHS preferred stocks act the way they do. On the surface, it seems really illogical: CHSCP is an 8% coupon issued by a fairly strong cashflow company, it’s been callable for almost a year, yet it’s been trading well over par (currently yielding ~6.5%) for decades. Simultaneously, other issues the same company that aren’t yet callable (like CHSCL) are much closer to par and seem stable yielding 7.3%.

    I’m new to this, but researching it a little I think simple answer is that CHS isn’t a typical company, and these preferred issues don’t really function the way most preferred stock functions. CHS is a coop, substantially owned by the farmers who are members. The local cooperatives (and sometimes the farmers themselves) receive “equity certificates” which in complex manner are automatically converted into preferred stock. These can be sold on the open market, but many times they are just held for the dividends at least until the death of the original owner.

    There are two main results of this. The first is that the preferred stocks aren’t as liquid as would be normal for their size of issue. At least historically, the holder might not even have brokerage account. The second is that since they are primarily held by members of the coop, calling them at par would hurt the same members that the coop is set up to benefit. I think uniquely among current preferreds, the call date for CHSCP was unilaterally extended by the coop until 2023 as a benefit to the holders.

    This results in an expectation by current holders (but not necessarily new buyers) that none of the preferred series are likely to be called even if the coop would benefit financially from doing so. A change of management strategy might one day cause them to call these issues, but most individuals holding them today think this is unlikely. Combine this with the fact that some ETF’s include the CHS preferreds in quantities based on the size of their issue, and this results in high demand for a largely illiquid stock.

    But as I said, I’m new to these. Is this mostly right? Are there important parts I’ve got wrong or left out? Likely some of you here know a lot more about these than I do.

    1. Great post. Always make sure I have some CHS preferred’s as part of the portfolio. They are the definition of shareholder friendly. Ebbs and flows, obviously, with interest rate movements, but CHS has your back. Been a shareholder for a very long time and will continue to.

      1. Pig, I play around with them often as hideouts. Probably should keep a core too. Lately I had CHSCN but it jumped about 60 cents so I sold the other day. And then yesterday decided to buy into CHSCL again at 25.65. I think I have ran the cycle of all of them many times over. As long as one avoids O or P (no reason to own them anyways) call risk is immaterial in the other 3.

  2. I managed to get a full position in CHSCN at below par last spring and stuck it in the sock drawer! Maybe if it goes sky high will I sell it.

  3. Sold CHSCN once before at 26 and bought back at 25 then sold 65 points higher. All the analysis in the world doesn’t hold a candle to unexplained price movement.

    1. Hence my motto, Martin:
      “Its better to be lucky than to be good.”
      Explains the vast majority of my investing successes.

  4. Absolutely nothing makes sense when it comes to CHS preferred pricing when comparing each issue. I have no idea when they will actually redeem one but when it does happen I am sure it will not make sense which one gets called either.

    Glad to be in L and O at a decent price. A call won’t kill me. Avoiding the whole drama.

      1. I agree Tim. I would love it if we could have additional agriculture cooperative related preferred issues from Land O” Lakes, Dairy Farmers of America, Growmark/FS or others. I would also love to see ADM, Bunge, The Andersons, Bayer, or BASF also offer preferred or baby bonds. DFA and LOL have 144A bonds, but these securities are only available to institutional investors. Corteva does have CTA,B and CTA,A available, which have been renamed 3 times I believe, initially Dupont, then Dow Dupont, now Corteva.

        1. Glmpa, unfortunately nowadays true preferreds are largely financials, reits, and $h!thole companies. Its not the glory days of the 50s and 60s where the Exxons, Texaco’s, and IBM’s of the world had preferreds as part of their capitalization structure.

            1. Doubt it. Why take on a periodic coupon payment that isn’t tax deductible? Consider a company that can issue debt right now at 5.5%. Since it can deduct the interest on the bond, but it can’t deduct dividends paid to preferred shareholders, that same 5.5% issued as a preferred would cost the firm about 7.5% (the 5.5% cost plus the taxes on 5.5%, estimated w/ 21% corporate and ~5% state).

              One answer would be that the tax preferences on the investor level might offset the tax drag at the issuer level. But it’s not enough. For an individual investor in the 12% bracket plus a 3% state income tax rate, the 5.5% bond makes about 4.7%. A preferred paying out 5.5% makes 5.3% (only the 3% applies assuming qualified dividends). How narrow do you want to go on the premium from a mezzanine bond to preferred? Probably a bit narrower, maybe 25-30 bps instead of 60 bps? So maybe a 5.1% preferred, 4.95% after tax, which still costs the company 6.9% in pretax earnings to support. Even if the investor doesn’t need any premium from mezzanine to preferred, we’re looking at around 6.2% for the company, still more expensive than 5.5%. Same story with somebody in the 22% bracket: 5.5% note makes 4.1% after tax, even with no aftertax premium on preferreds, the company pays more (.041/.82=.05, .05/.74=.0675). Again, same story with a corporate taxpayer not affiliated with the issuer: 5.5% note makes about 4.1% (assuming 5% state income tax), to pay the same aftertax return on a preferred with dividends received deduction for corporations, the issuer needs 6.5% in pretax earnings to support a 4.8% preferred payment.

              And that’s all ignoring that many investors are tax-insensitive: IRAs, pensions, nonprofits, which can all absorb ordinary income debt payments.

              The reason many reputable firms issue preferreds has to do with different tax rules or with regulatory rules. We’ve all heard the story about banks including noncumulative preferreds in tier 1 capital; for them, they can’t add any more tax deductible leverage, so they go on to the next kind of leverage so long as the cost of preferreds are cheaper than their cost of common equity. MLPs, REITs, BDCs, and so on can issue preferreds because they aren’t taxed like normal corporations, so the preferreds can be allocated income that would otherwise be allocated to the common investors. This is a backdoor form of deducting dividend payments; allocating it away from common and deducting it have the same ultimate effect. Even utilities have weird regulatory issues where a regulator is probably not going to make a utility issue preferreds, but so long as the regulator allows it, the utility does not care because it will just include the cost of preferred equity in the rates.

              So why else issue preferreds? Probably because you can’t issue more investment grade debt, or maybe your firm is running into the deductible debt limits from TCJA. My whole post started with a 5.5% note with deductible interest payments. What if you can’t really get a note at all, or you could but you feel the capacity limits coming, and you don’t want to use it up yet? Hence we have the shaky firms, too.

              The market structure isn’t going to change until the tax regime changes.

              1. Cervantes, precisely…Back in “The Glory Days”, HQ companies could issue preferreds for yields resembling closer to long dated treasuries. Why? Because as you mentioned, the tax code…Corporations would actually buy up other companies preferreds because of the enormous tax savings they could receive from the income received from such securities. That tax code of yesteryear is long gone….Thus why we never see an “Exxon” type preferred issued anymore.

    1. I agree…Like why N trades higher than L….7.10 vs 7.50….not so sure where they closed yesterday but lately that has been the case

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