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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.

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

  1. 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
        Authorized Shares
        Outstanding Shares
        Held at DTC

        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?


          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.

  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!

  3. 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.

  4. 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.

  5. 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!


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