Past 1st Call and Trading Above Liquidation Preference–Until It Isn’t

Markets are dangerous for snoozers and dreamers.

Data center owner Digital Realty (DLR) has called their 5.875% perpetual preferred today–effective 10/15/2020.

The issue went ex-dividend yesterday for around 37 cents.

The issue has been redeemable since 4/2018, but yet was trading near $26 a day or two before ex–it went ex for 37 cents but bounced right back up toward $25.90. The company dropped the call this morning and shares are now trading at $25.06.

It is interesting that DLR is selling Euro Note debt at 1%–hint–don’t be fiddling with investment grade preferreds past call dates.

Of course we all mostly know this, but I post it as one more example of what a newer investor should not do.

48 thoughts on “Past 1st Call and Trading Above Liquidation Preference–Until It Isn’t”

  1. Larry…Tim was trying to tell you not wise to hold on to redeemable preferred shares if they are trading much higher than the call price of ($25)….if you choose to do so……..you risk a substantial “hit” back to $25…..sometimes you can be lucky and collect a final dividend….make sense?

  2. Tim, I read your post several times. I still don’t get your point. What is it that “a newer investor should not do” ??

    I bought this on 4/19/2013 for 24.91 (back when you could buy at issuance and usually get a small discount to par). It has been in the “sock drawer” ever since. Unlike most here for which that means “I won’t ever sell it, I won’t ever sell it…, oh, I sold it last week and bought it back and sold it again”, I haven’t ever cared what it traded at, and fully expected it to be called someday. I guess I was expecting it to be a perpetual 5.9% (my YOC) which would have been just fine, but oh well.

    If you are saying that newer investors in preferreds shouldn’t ever buy over par, well yes that is a given to me. But if you are berating them for not being able to predict a call, when none of us have that ability… well then color me confused.

    1. Larry,
      To me the danger Tim may have been referring to would be buying above par past the call date. New or experienced investor, this can be a dangerous move.
      Obviously a $26 market price a day or two before ex d for a past call date issue is just a no no as you said. But someone was buying it then.

      I too prefer to buy below par or even @ par and hold until it’s called whether @ announced call date or beyond – especially with IG issues. That’s basically my modus operandi. Buy and hold. I sometimes have to buy a little above par especially in these current times if I have funds to put to work. In that instance I try to use YTC for guidance.

      As an aside, DLR is on the low end of IG and only has an IG rating from Moodys I think. So 1% Euro Note what with foreign currency risk, etc. Goodness. Of course maybe they are in that debt market to finance European operations. Honestly I don’t know.

    2. Larry–I think that holding an issue of this quality at $26 of this quality when the company has shown the willingness to call issues when possible isn’t the best move–especially just after ex.

      If you, as an experienced investor in these types of securities, want to hold it that is fine–we all measure the likelihood of a potential call and act accordingly–I do it.

      As far as buying above $25–I do it quite often–issues that are currently redeemable–but I attempt to measure the risk–typically 25 plus accrued (maybe a nickel more)–buying an issue like this that is 3-4% above after ex date–knowing they will call when they can is an expensive lesson.

      As far as ‘berating’ someone — never in 14 years of publishing has anyone said I was berating someone.

      1. OK Tim, I should have used a milder word like “scold”. Apologies.

        I don’t consider myself experienced at all. And it’s for that reason that I really don’t watch the prices on my preferreds at all. Should I have sold mine at 26? Absolutely, but that’s in total hindsight. I didn’t know a call was coming. Some of you may have suspected it but that’s in hindsight as well. If this had been discussed, I guess I missed it because I just don’t have time anymore to slog through the comments looking for morsels.

        1. No big deal Larry–I guess I had my old school preferred investor hat on. I don’t want to be perceived as being harsh on people. I consider these types of calls as ‘lessons learned’. Folks should look at least every week or two because it is really easy to ‘zone out’ on holdings if you have 30, 40 or 50 issues–things creep up on you.

        2. Fortunately for me… when I slog through some comments here (and there is a lot), sometimes it can be worth thousands of dollars. Slogging is painful finding things, but you get paid doing it. It does help if you have an RSS reader and you can see the new posts and go into them. If you dont have an RSS reader… i agree it would be painful.

          I try to keep 90-100% invested, but do like to move about 10% of the portfolio around. So reading comments here can be rewarding for me personally.

  3. I own some DRL.PRL, cost basis of $24.71, as. rule I try to never buy above the face value.

    I am pretty fond of DRL as a company, solid positioning in an increasing data based world. But this site has taught me to never buy common shares for dividends , when the preferred offer a bit more protection against dividend cuts.

    1. SDS, you can buy common shares for dividends + dividend growth, something you never get from a preferred. The greatest returns come from finding good companies that can grow those dividends fro years, of course easier said than done. DLR common may be one of those??

      1. Hi Chris, I agree!

        I tried the individual dividend growth stock thing for a bit using the Simply Safe Dividends website and found a couple of problems in terms of it working for me….I still pursue it but I switched to ETFS and accepted the downside of that approach.

        The growth strategy had some issues for me personally….

        1. Took a lot of time to manage it (my issue) , not enough time for surfing 🙂
        2. They would change the dividend rating to low right before it cut dividend (probably also my issue for not paying attention)
        3. I got sucked into “buying as it dropped” to lower cost basis (human nature I think) and didn’t follow my own balancing rules ending up with several over weighted stocks that dropped in 2020 (this is totally my issue, I know, but I gave up trying to fight my human nature). A score of 99 looks great to buy on the dips until it keeps dipping and the score suddenly goes down (WFC is great example of my inexperience catching me off guard)

        4. The highly rated ones were always over priced and pay <3% compared to the yields you can get with preferred shares. I prefer the higher yield today to pay for some other things like kids school and keeping my life insurance bills paid (got family of 4)

        I now seek div growth using index funds that are after that approach (like VIG and some others) and have limited the tools I use to invest to save me some analysis paralysis and too much time researching individual stocks.

        All that said, I still enjoy working with the post on this site to find individual preferred shares that fit my risk profile because this site has opened my eyes to a whole different world of investment options and approach.

        -SDS

        1. SDS said: “The highly rated ones were always over priced and pay <3% compared to the yields you can get with preferred shares. “

          SDS, speaking of common stocks as opposed to preferreds, one common method of forecasting total returns is to add the current dividend yield plus the annual dividend growth rate. Two diverse examples would be a company that yields 5% but does NOT grow its dividend, compared to a company that yields 2% buy grows it dividends 3%/year. To a simplistic view, the total return of these two is expected to be the same going forward.

          Stated differently, this is why highly rated growthy stocks yield less. A lot of research on this tradeoff has been done on REITS. REITS make a nice study as opposed to comparing companies in different industries. Long story short, the long term total return winners were the low yielding, higher dividend growth issues. When you went with the higher yielding issues you inevitably had lower returns.

          Obviously this does NOT apply to preferreds since they have constant payouts, excepting the “fixed to float” issues. But a different rule applies there. As we learned in the March crash, many of the higher yielding issues not only crashed deeper, but have yet to return to their pre-crash levels. So buying preferreds strictly based on high yields might not work out so well. Grid’s close personal friend Rida, has made a career out of recommending the highest yield commons and preferreds. He has also managed to lose a lot of money for his subscribers. Just a different way to suggest it is better to pay up for quality and accept lower initial yields.

          1. Tex, much appreciated thank you! The feedback from folks is why I love this site. Copy all on the quality vs. yield tradeoff. Hopefully I will get better at this as I continue my journey!

            -SDS

  4. Speaking of fiddling with investment grade preferreds past call dates, I bought shares of CNTHP for $58.75 today (5.58% yield). It’s a very small part of my overall portfolio so I throw it in the “calculated risk” bucket.

      1. I think I ready your comment about someone calling IR and being told the company had no intention of ever calling any of the CL&P preferreds.

        1. Dick, I even found a better Rosetta Stone than that….rate filing procedures to the state PSC… You jumped me btw…Past two days I was patiently guiding that $59 1300 share block down, getting a couple hundred at $58.60 and .70…About to throw in towel and buy the rest at $58.75 and you and your minions jumped me and cleaned it out, ha!

          1. Where the heck did you find that? I’d love to see if if you don’t mind sharing a link.

            I didn’t buy much…I’m sure it’s nothing to a man like yourself. In any case, my apologies for messing up your plan. Being inpatient is what I do best. LOL

            1. Dick, all is fair in love and war as they say…I got greedy and was trying to tweak a dime more.. But seriously I got worse problems and you actually helped prevent more problems. Im still on margin, in fact more. I need to quit looking at things to buy and focus on what to sell. I dont invest on margin, I just use it as a holding tank until I figure out what to sell and quickly get off it. So tomorrow, I will get that taken care of, and put a block on the buy button, ha.
              Regulators already approved cost of preferred stock (rate payers pay it) and filings show company doesnt want to redeem them either…They use all the preferreds as one series which is a 4.75% blend which is still reasonable and regulators approved it all…
              iii. Cost of Preferred Stock
              The January 11, 2018 Settlement Agreement provided for a cost of preferred stock rate of 4.75% for each of the three rate years, 2018, 2019 and 2020, and was the same as proposed in the Application. January 11, 2018 Settlement Agreement, Attachment 6.
              The preferred stock rate is purely a historical rate reflecting the Company’s cost to carry the preferred stock issuances made over 1949 to 1968. Preferred stock has not been issued since 1968, but this asset class is perpetual and will remain outstanding until the Company chooses to call it in. The Company’s explanation for leaving the preferred stock outstanding is that the credit rating agencies give up to a 50% credit for preferred stock to their credit rating matrix, thus up to 50% of the outstanding preferred stock may be treated as common equity for credit rating purposes with the remainder treated as long-term debt. This treatment has the effect of increasing the Company’s common equity portion for credit rating purposes. Additionally, the cost of preferred stock is much cheaper than the cost of common equity and only slightly more costly than long-term debt; thus, it is more cost effective for the Company and the customers to keep the preferred stock rather than refinancing it with common equity. Response to Interrogatory FI-94; Tr. 2/8/18, pp. 167-169. The Authority finds the proposal reasonable and approves the cost of preferred stock of 4.75% in each of the three rate years.

              1. Grid, how come you never told me about this? If I’d known it earlier, I would have scooped you, guess that’s why you kept it far from me – smart man. LOL
                So now my question is: which issues fall under this definition? CNLPL? CNTHO? CNTHP? CNPWM ?

                But seriously, thanks for this info. Now I have so much more confidence my CLP issues will be alive and kicking for the forseeable future.

                1. Inspy, I didnt find until Sunday, ha. It basically just reinforced what I have been saying for 7 years as you know. Just never looked for the smoking gun until this weekend.

                  1. Inspy, they are a different subsidiary with different regulatory jurisdiction but I would suspect so. Plus yields are low causing no regulatory issues.

              1. Somebody else is finally learning how to dig, too! 🙂
                Tim, lets test your sleuthing skills and name this one…It shouldnt be too hard…
                d. Cost of Preferred Stocks
                The Revenue Settlement Agreement provided for a cost of preferred stock rate of 8.00% for each of the three rate years 2019, 2020 and 2021, and was the same as proposed in the Application. Revenue Settlement Agreement, Attachment 6.
                The preferred stock was issued in 1910 and had been issued with a fixed dividend that cannot be altered by the Company. The Company does not have an option to redeem the preferred stock at a fixed price, as it has a non-redeemable clause. The Company had made tender offers for the outstanding shares. At the time CNG was acquired by UIL Holdings in 2010, the Company had $750,000 in preferred stock outstanding. Since then, tender offers have been made with the latest in 2014, and the Company has been successful in reducing the amount to $340,000, presently. The Company has no plans to execute another tender offer and expects the remaining balance to remain outstanding. At this point, the Company indicated that it is not possible to tender more of the preferred stock, as the remaining handful of preferred stock holders do not want to redeem their holdings, given the 8.0% yield. Responses to Interrogatories FI-114 and FI-229; Tr. 10/5/18, pp. 59 and 60.
                The Authority considers that preferred stock carries the characteristics of both long-term debt, as it pays a fixed dividend, and common equity. As a result, the Company’s common equity portion for credit rating purposes increases, all else equal. Additionally, the cost of preferred stock is cheaper than the cost of common equity but more costly than long-term debt; thus, it is more cost effective for the Company and its customers to keep the preferred stock, rather than refinancing it with common equity. The Authority approves the 8.00% cost of preferred stock for each of the three rate years.

                1. Hmm, I’d have to guess that it’s referring to Connecticut Natural Gas CTGSP preferred which is now a subsidiary of Avangrid.

                  1. Spot on Tim! and Inspy! Due to goofiness and time. Its actually owned by hold co CNG, which is in turn owned by hold co UIL, which in turn is owned by Avengrid which in turn is owned basically by Iberdrola.
                    I did catch them in misleading regulators on share count and who actually owns most of those outstanding shares though.

                    1. Now considering if it makes sense to buy CTGSP instead of bank CDs.
                      Have a CD maturing in about 3 weeks, should I use the proceeds to buy as much of CTGSP as I can?

                      Even at the high current ask price, one can realize a 3.3% dividend rate, which is way more than I can get from any bank today.

                    2. Inspy, Its about 3.7%…Preferred is BBB+ rated… It is what it is, price stays pretty high in relation to relative market average yield. So its hard to get at a decent yield. To be honest, I have doubled back on this from a year or so ago and been periodically buying.
                      I could crash the share price if I wanted too since I own close to a third of the tradable float. There are only 28,000 tradable shares on the DTC that are available and then you have subtract mine from that.

                2. Connecticut Natural Gas Corp?

                  Ah, I see Tim beat me to it. Looks like CTGSP is the only 8% issue outstanding.

                  1. Is it a $3.125 par issue?
                    that is what the payment seems to calculate out to.
                    Did this get up to near $10 a few years ago?

                    1. Justin, About 6 years ago CTG the parent of Connecticut Gas offered a $7.50 tender. Then a few months later raised it to $10.25 to get more people to cough them up. About 70,000 shares of the approx remaining 100,000 shares tendered (the float had been getting slowly roached out over many decades since issuance) Considering it was trading about $5.50 then obviously some people never got the message. As a few months later when tender expired people were back selling in the $6-$7 range again.
                      I get my annual “unfriendly” snail mailed letter yearly telling me I can attend the annual Connecticut Gas Corp. shareholder meeting. Then promptly tell me CTG owns 100% of the common stock and “at least 69%” of the $3.125 par preferred, leaving less than 1% of all voting power in $3.125 preferred shareholder hands (these were issued voting preferreds with a voting ratio higher than commons). So not much of a reason for me to fly to Connecticut and attend, ha.

                    2. Justin, I saw your post in another thread and it reminded me to tell you this as you will be amused. I forgot to mention this but there is a reason why CTGSP is a $3.125 par preferred. See when it was originally issued the preferred had more votes per share than common stock did and had to maintain a specific ratio. When Connecticut Natural Gas was a public traded common stock It had 4 stock splits over its history. Every time the common got a stock split, the preferred also got a stock split. So after 4 common stock splits the original $25 par preferred was split 4 times to become a now $3.125 par preferred. Although I understand why the preferred had to to be split, I find it amusing as it is the only “preferred stock split” I have ever heard about.

            2. Dick, you can sleep better now knowing I bought 130 at $58.85, to give me an even 300. Just because they appear not to ever redeeming doesnt mean they wont. So I will keep this modest at this price. Earlier this year I bought a huge slug in mid $50s and sold at $60, but that was a pure load up flip. The funny thing is My blended ave price in total wound up being the $58.75, I could have bought at with no effort and not had to work at it, ha.
              I still remember the good old days when Inspbudget and I would fret over buying CNLPL and CNHTP at $53 and worried we would soon get hit with a call loss. 🙂

              1. Grid, you sure have a long memory, lol.

                Yeah, I foolishly flipped CNLPL about a year ago, was never able to get them back. Fortunately, I still have CNTHP, but will add more if it ever goes below $56. Likely a long, long wait.

              2. Grid – thanks for the tip on CTGSP. Just started dipping my toe in the water on that one below $7. If the float of CTGSP is so low, why is there 1,000 bid and 1,000 offered on the OTC?

                1. Who knows, remember that is only $7,000 bucks, but yes its a decent percentage. As you can see less than 26,191 are actually available..Back out mine that I own and ya that is well over 5% of the float, ha. CNG the parent owns the rest of the 108,000 shares from a tender a few years back. The float was hugely bigger back when issued over a 100 years ago, but have been bought up and retired. They shrunk the float, but they are forced to keep a majority of dont want to get in some kind of trouble financially and not pay the menial dividend and have some dweb with $50k worth of the company preferreds controlling a billion dollar operation.
                  Just remember this isnt a very high yield at all…And that is putting it modestly, ha.

                  Market Cap Market Cap
                  750,071
                  09/16/2020
                  Authorized Shares
                  884,315
                  09/16/2020
                  Outstanding Shares
                  108,706
                  09/16/2020
                  Restricted
                  0
                  09/16/2020
                  Unrestricted
                  108,706
                  09/16/2020
                  Held at DTC
                  26,191
                  09/16/2020

                  1. Thanks, Grid.

                    Not a high yield for sure on CTGSP, but certainly better than the 2 basis points I am getting on my un-invested cash in my Schwab and Fidelity accounts.

                    With the Fed announcing they are going to keep rates low until The Rapture, the thirst for yield may just be getting started!

                    1. I have had bids out for CTGSP for some time now, was never filled.
                      As Grid says, gotta be patient.

                      Grid, thanks for the mention of UEPEM. I bought 200 shares @97.
                      Sold UEPEN at very close to breakeven to finance the buy.
                      This swap gives me about 12 basis point better yield, with identical quality and safety.

                  2. Grid – what website do you use to get that shares outstanding and “Held at DTC” info from on CTGSP? Are you utilizing a Bloomberg terminal?

                    Thanks!

                    1. Thanks again, Grid.

                      Speaking of highly illiquid OTC yield issues, did you see the DMRRP today? Somebody got 142 shares at $94. Sadly, wasn’t me. I have been trying to buy that thing for months.

                    2. Rob, I see that…I sold out 300 on a good break at $105 a month ago or so after buying around $90 a few weeks prior. I thought about laying a bid this morning but passed. I pretty much have my personal tolerance limit for low 4% yields now. I try to spread things out a bit. I really need to pluck a few 6% plus issues…I saw PPWLO sold in $120s today. I tried to hit it in $120s also but nothing happened and have been jumped since, so I pulled it.

    1. I have owned CNTHP and CNTHO for some time now. They did not call during the 2008 crises, so I hope they will not call anytime soon.

      And as Grid says, the probability of them calling is quite low.

      Same situation as the Ameren Illinois Preferred issues. I have 3 of their issues, but because the stuff is so thinly traded, my broker marks them at bid; so I have huge unrealized losses reflected on two of them, LOL. Only issue positive is AILLL

    2. Dick–of course with those issues it is a somewhat different game. Actually my reference is to something other than the ‘illiquids’.

      1. My comment was in jest. I got a laugh out of this post after I just paid 15% above redemption price on a past call issue. Your original post is definitely good advice. I hold a large position in IPLDP and I struggle with whether to sell as the prices have been creeping up lately. Thanks!

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