Three Good Preferred Stocks To Consider
- In spite of a turbulent market, the U.S. economy appears to be doing well. The Fed cuts interest rate again.
- This economy and market continues to favor preferred stocks.
- Introducing 3 preferred stocks that are reasonably safe, have solid payout ratios and above average yields.
This article was written by Richard Hill
I Prefer Income! maintains a Preferred stock & ETD database program with over 640 preferred stocks & ETD (exchange traded debt securities). The list is updated daily and contains more than just a simple list of names. There are 37 fields of information, including demographics and important financial metrics to help the member dig a little deeper when doing research on individual issues. The metrics include earnings, payout ratios, debt ratios, dividend metrics and Credit Ratings on the individual preferred stocks and ETD securities.
The Fed cut the federal funds rate a quarter point this past week to help the economy with the perceived slow down. The stock market had another wild week with the dow ending lower than it started. The 10-year treasury rate also ended lower at 1.74%. And PFF, the preferred stock ETF, headed higher every day. Last week, I reported that there out of 640 preferred stocks and ETD securities that are maintained, there were only 123 that were below par. That number has now dropped to 107 securities. It appears that the trend toward lower interest rates continues to move forward. All the factors now in place suggest that preferreds and ETD securities are a good investment, but only if you can find solid stocks at reasonable prices and yields.
There are still good choices available, but investors may have to lower their expectations a bit. It is almost impossible to find good selections with yields above 8%. Now, it is more likely to find good selections above 6% and maybe a few above 7% that are close to par. Investors need to be able to do the research to make sure the metrics are in good shape. The IPI Preferred stock & ETD program has the financial metrics to help each investor determine if the company is reasonably safe and can pay the dividend on a reliable and sustainable basis. Hope you can take advantage of the information that is available.
After doing some research, I have uncovered 3 cumulative preferred stocks that I would like to share with members. They are from different industries with unique issues facing them. Two of the 3 are priced below par and the third has a price of $25.05. Yields range from 6.1 to 7.69%. All have good payout ratios and good to fair debt metrics. These 3 are not investment grade, but I feel they are reasonable risks and provide a good risk/reward relationship.
As is my practice, I analyze the securities by first reviewing 5 important financial areas: Earnings, Payout Ratios, Debt Ratios, Dividend Metrics and Credit Ratings. These metrics are grouped and highlighted with different colors. This gives me a great first review of the issues and lays the foundation for further analysis. My goal is to uncover solid choices that meet my requirements for safety and reliable / sustainable income. The 3 picks are located in the table below.
(Table 1. Source, I Prefer Income)
To read the table properly, the parent company is in the top row with grey background. Each of the preferred stock issues are located directly underneath the parent row. All metrics are on the parent as they are responsible for the preferred stock. However, the credit ratings are on the preferred stock. Here is information on each parent and issue.
Cedar Realty Trust, Inc. (CDR) is a real estate investment trust (REIT) that owns a portfolio of predominantly grocery-anchored shopping centers in high-density urban markets from D.C. to Boston. Cedar Realty Trust has 2 preferred stocks. CDR-C is a “non-cumulative” preferred stock with a price of $22.48 and a yield of 7.2%. It issues a 1099.
Financial metrics are fair to good. GAAP Earnings show that out of the last 5 years, only 2 have been profitable. Out of the last 5 quarters, 4 have been profitable. But as a REIT, the Non-GAAP metric is the best metric to use to determine earnings and cash flow. Table 2 shows the earnings history over the last 5 years and quarters for both GAAP and Non-GAAP earnings. It is easy to see that FFO provides plenty of cash flow to pay the common stock dividend. It is not reported in the table but TTM for both OCF (operating cash flow) and FCF (free cash flow) are .64 which easily covers the common dividend. As a result of good FFO, the dividend payout ratio is .47 and even better for the preferred payout ratios.
Debt ratios are mixed, with debt-to EBITDA being too high and debt-to-equity ratio that is acceptable at 1.2. Credit ratings for both Moody’s and S&P are NF / NF. Dividend growth is 0%. This refers to the fact that their annual dividend has remained the same since 2012.
The metrics do not show growth, but they do show a degree of stability, with earnings and payout ratios that easily cover both the common and preferred stock. The big area of concern is debt and warrants further research.
(Table 2. Source: I Prefer Income)
(Table 2a. Source: I Prefer Income)
Energy Transfer LP (ET) is a large MLP / midstream company whose core operations include transportation, storage and terminalling for natural gas, crude oil, NGLs, refined products and liquid natural gas. Services are in both the United States and China. Energy Transfer LP has 3 preferred stocks. ETP-D is a cumulative stock with a price of $24.80 and a yield of 7.69%. It is also a Fixed to Floating rate that begins on 8/15/23 with a rate of 3 month libor + 4.73. Please note that ET issues a K-1.
I consider the financial metrics to be good. The company reported GAAP earnings for last 5 years and quarters to be profitable with no losses. They also report Non-GAAP earnings shown in table 3. Yearly records for DCF are not available since the merger, but the last 5 quarters is available. It shows that DCF (distributable cash flow) is much higher than EPS and easily covers the dividend.
As a result of excellent DCF, the payout ratios are all good to excellent. Debt ratios are mixed with debt-to-EBITDA being high and debt-to-equity being fair. Moody’s and S&P credit ratings are below investment grade at Ba2 / BB. Dividend metrics are fair to good. Dividend growth shows an increase of 2.8% and ET has been designated as a Dividend Diamond because they have increased their dividend every year for the last 13 years.
Many investors feel that ET is geared primarily toward growth and not as focused on reducing the debt and increasing dividends. Evidence of that is ET’s recent announcement of a proposed purchase of Semgroup for $5 billion. However, many feel comfortable with ET and their future. Consider reading Brad Thomas’s favorable article on them recently.
(Table3. Source: I Prefer Income)
(Table 3a. Source: I Prefer Income)
Monmouth Real Estate Investment Corporation (MNR) is one of the oldest public equity REITs in the world. They specialize in single tenant, net-leased industrial properties subject to long-term leases primarily to investment-grade tenants. MNR has one preferred stock. MNR-C is a cumulative preferred stock with a coupon rate of 6.125%, a price of $25.05 and a yield of 6.1%. It issues a 1099.
The metrics for MNR are good to excellent. MNR reports the last 5 years of GAAP earnings as being profitable every year; however, the last 5 quarters show 3 profitable quarters and 2 unprofitable. Since MNR is a REIT, they also report Non-GAAP earnings of AFFO (adjusted funds from operations). Table 4 shows the comparison between EPS and AFFO and it is clear that Non-GAAP metrics are much better than EPS and cover the dividend with comfort. As a result of good earnings, the payout ratios for both common stock and preferred stock are very good. Debt-to-equity ratio is the best of the 3 preferred stocks at .9. The only somewhat negative metric is credit ratings of NR / NR.
Dividend metrics are good. Since MNR is one of the oldest public equity REITS, I looked back and found that they have a long history of paying a dividend without ever reducing it, even during the great recession of 2009. Their record shows paying a stable dividend for years and only recently beginning a period of increasing their dividend over the last 3 years of 2.6%.
Final note. In a prominent spot on the MNR website, they post the following statement: “Monmouth was recently named by SNL Financial as The Best Performing Industrial Property REIT over the past 10 years with a total shareholder return of 233%. Our long-term shareholders have enjoyed one of the best dividend track records of any REIT. While the past few years have seen great achievements for our company, we are very confident that the best is yet to come.”
(Table 4, Source: I Prefer Income)
(Table 4a. Source: I Prefer Income)
(Table 4b. Source MNR website)
In summary, as interest rates drop and the market increases, there are less opportunities to invest in preferred stocks & ETD securities at under par. Out of over 640 securities in the IPI database, only 107 are available at less than par ($25.00).
In this article I introduced 3 preferreds stocks with prices close to par, yields above 6% and metrics that are fair to good+. CDR-C is a retail shopping center REIT. That industry is out of favor and until there is more evidence of CDR and others in retail group being able to survive in good shape, the prices will probably hover at the lower end of the price range providing a potential buying opportunity to those who feel that CDR is doing just fine and has the low payout ratios to prove it.
ET is also in an industry that the market is not comfortable with; and as such, prices are down and yields higher than the 10-year median averages. ET is in an industry and a recent record that does concern the market. The company leadership appears to be focused on growth at the expense of reining in debt. However, others consider that to be a good strategy. The historical dividend record shows the company paying dividend since 2006 and never cutting it even during the great recession. They are also designated as a Dividend Diamond as they have increased their dividend every year for the last 13 years. While the debt is higher than the market would like, the company has indicated they are moving to reduce it in the future. ETP-D provides the highest yield of the 3 preferred stocks at 7.6% and arguably, the best risk/reward of the 3.
MNR is one of the oldest public REITS and has a solid record to make them one of the leading industrial REITs in the marketplace. With a good record of earnings, payout, debt and dividend metrics, MNR-C appears to provide an excellent opportunity to invest in preferred stock with a yield above 6%. The only negative metric is the credit ratings of NR / NR; however, the other metrics are in very good order and should provide comfort to most conservative investors.
I will continue to say that as interest rates continue downward and the market heads higher, the search for yields will only become more challenging. Waiting for better days might not result in more opportunities. I hope you take this opportunity to login and check out 1 or all 3 programs we have, including Preferred & ETD Securities, the REIT program and the Dividend Diamonds 25+ (companies that have increased their dividend 25+ years in a row) program. If you are not a member, please consider joining. The benefits are many and the price is FREE. Here are two links that are available.
Register for FREE Membership: Click Here
If you are a member, login to IPI Database: Click Here
Thanks for reading.
I Prefer Income
Disclosure. I own CDR and ET preferred shares and may buy MNR-C over the next 72 hours.