The preferred stock market suffered one of its worst selloffs in decades, with yields on major banks’ preferred issues falling from 4% to around 6%. But with yields now at their highest level in five years, the $350 billion market has become more attractive.
Some preferred issues have fallen nearly 30% this year, a considerable drop for an asset class that many investors consider relatively low-risk. The losses reflect rising long-term interest rates and widening yield spreads over Treasury bills. Most preferences are perpetual, which can make them extremely sensitive to rate changes. Many are down more than long-term Treasuries, including the iShares 20-Year Treasury Bond exchange-traded fund (ticker: TLT), which is down 22% in 2022.
Frank Sileo, Fixed Income Strategist at
wrote recently that the market has a “more favorable outlook,” citing “improved valuation” and a better backdrop for Treasury yields after big rate hikes this year.
“From a credit perspective, the market is in very good shape,” says Eric Chadwick, president of Flaherty & Crumrine, a preferred stock-focused investment firm with $4.5 billion under management. He points out that the banks dominate the market and that their “balance sheets are solid”.
The biggest losses came in preferred shares issued last year which had historically low dividend yields.
The 4.2% preferred issue (JPM Pr M), a $2 billion issue, has fallen almost 30% this year to $18, taking its yield to 5.85%.
The 4.75% issue (WFC Pr Z) is now trading at $19.50 to yield 6.1% and
The 4.75% issue (T Pr C) is at $19.25, giving 6.15%.
Vornado Real Estate Trust
The 4.45% issue (VNO Pr O) is at $17.50, giving 6.35%.
The face value of these issues is $25 per share; they were all trading around this level at the end of 2021.
Buying preferred shares at a discount to face value alleviates one of the market’s problems. Preferred shares can generally be redeemed by issuers in five years, which limits their upside potential. But if an investor buys a preferred stock at a steep discount, the potential for appreciation is considerably higher.
The largest ETF, the $16 billion iShares Preferred & Income Securities (PFF), is down 15% this year to $33.50 and yielding 4.5%.
|Favorite Number / Ticker||Recent Price||Change since the beginning of the year||Yield|
|JPMorgan Chase 4.20% / JPM Pfd MM||$17.90||-29.9%||5.85%|
|Wells Fargo 4.75% / WFC Pfd Z||7:44 p.m.||-24.8||6.11|
|AT&T 4.75% / T Pfd C||19.24||-26.7||6.16|
|Vornado Realty Trust 4.45% / VNO Pfd O||5:43 p.m.||-29.4||6.36|
|Qurate Retail 8% due 2031 / QRTEP||79.35||-23.1||10.09|
|ETF / Symbol|
|iShares Preferred & Income Securities / PFF||$33.50||-15.0%||4.39%|
|Closed-End Fund / Symbol|
|Flaherty & Crumrine Preferred Securities / FFC||$18.12||-16.6%||7.88%|
|Nuveen Preferred Income Opportunities / JPC||7.87||-19.4||8.08|
Note: Preferred shares have a face value of $25, with the exception of Qurate Retail, which has a face value of $100.
Closed-end funds yield more, which reflects the use of leverage. The Flaherty & Crumrine Preferred & Income Securities (FFC) and Nuveen Preferred & Income Opportunities (JPC) funds yield around 8%. The Nuveen fund is trading at a 7% discount to net asset value; the Flaherty & Crumrine issue brings a slight premium to NAV.
Preferred shares have long attracted retail investors because of their relatively high and secure dividend yields. Preferred shares with a face value of $25 are traded like stocks on the stock exchange, primarily on the NYSE, which gives the market more transparency than corporate or municipal bonds. There are also preferred shares with a face value of $1,000 for institutional investors that are not generally traded on exchanges.
Chadwick says these issues are often more attractive than $25 preferred shares. A recent problem, he says, is
Bank of America
$2 billion in preferred stocks that carry a rate of 6.125% for five years, then reset to float at a spread of 3.25% percentage points above the five-year Treasury. This issue has similar returns to fixed rate preferred shares, but less rate risk due to the variable rate feature.
The privileged offer tax advantages. Dividends are normally taxed favorably like common stock payments since preferred stock is a senior form of capital. Although preferred stocks are less secure than debt, companies are loath to omit preferred dividends, in part because ordinary dividends can only be paid if preferred payments are met.
Barrons has written about preferred stocks periodically, cautiously in our income investment outlook for 2022 and favorably in a recent article on bond market opportunities.
Write to Andrew Bary at [email protected]