Solid New Income Issues from Utility Related Issuers
By: Tim McPartland,
Income issues, particularly preferred stock issues sold by utilities during the last 12 months have traded very strongly above their $25 a share issue price right from the date of issue.
The strength of these issues reflected the demand for high quality issues and the lack of supply of $25 shares being issued by these companies. This week, we had a new preferred issue come to market from a utility and the performance of the issue during the first day reaffirms the strong demand for utility-related issues.
Natural gas utility Spire, Inc. (NYSE:SR) has issued a new perpetual preferred stock with a fixed coupon rate of 5.90%. The company sold 10 million new shares with no additional shares reserved for incremental demand. The dividends paid by this issue will be cumulative and they will qualify for preferential tax treatment. Standard and Poor’s rates these shares BBB, which is investment grade, while Moody’s rates the issue Ba1, which is a notch below investment grade.
This $25/share issue began trading on the OTC Grey Market (OTC:SIPRY) on May 15, 2019, and immediately opened at about $25.45. The share price continued to climb higher throughout the day and reached $25.80 before closing at $25.70. Keep in mind that the OTC ticker will be modified to SR-A when the shares move to the NYSE in a couple of days.
For those who are not familiar with buying preferred shares on the OTC Grey Market, we previously had written a “primer” on purchasing in this marketplace and that short article can be read here. The OTC Grey Market, where preferreds trade prior to moving to their permanent exchange, sometimes is called the “wholesale market, because shares often can be purchased there at reduced prices before they reach the more popular traditional exchanges, such as the New York Stock Exchange.
Potential investors should realize that a perpetual preferred does not have a maturity date and, while the company can optionally redeem shares in five years, there is a chance the issue will remain outstanding for decades. This uncertainty means there is plenty of interest rate risk in the issue. If interest rates rise, the price of these shares likely will fall.
The second new issue to highlight is a new baby bond offering from National Rural Utilities Cooperative Finance Corporation (CFC). This is a $25 billion non-profit corporation whose sole purpose is to provide financing to electric and telecommunications cooperatives throughout the United States. The corporation is not publicly traded and is owned by the cooperatives that it serves.
It has been years since CFC has had any outstanding exchange-traded securities and these new baby bonds are the only exchange-traded security they have outstanding and are perfect for a conservative income investor. The coupon is 5.50% and these baby bonds are rated BBB+ by Standard and Poor’s to qualify as investment grade. While the company optionally can call the baby bonds in five years, the maturity date isn’t until 2064. Thus, like the Spire issue above, this issue carries interest rate risk, so the share price likely will fall if interest rates rise.
Since bonds pay interest, that money is taxed as ordinary income. The bonds are now trading at $25.29 on the NYSE (NYSE:NRUC).
Investors are encouraged to perform their due diligence as the above is just a recap of a couple of investment-grade new issues and is not a recommendation.
Tim McPartland is a private investor with over 45 years of investment experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.