Outlook 2022: Record-shattering preferred stock issuance unlikely to be bested in 2022

Chicago, Dec. 31 – The dollar amount of new issuance in the preferred stock space shattered records in 2021, according to data compiled by Prospect News.

Just over $70 billion of new issues priced over the year with the closest runner-up 2021’s $46.16 billion.

The most commonly cited use of proceeds was general corporate purposes; however, it is clear from the data that low dividends were a driver in the space.

Around 80% of the new deals priced with dividends that came in at 4.99% or lower, a little more than double the dollar amount of new issuance that priced in that range in 2020.

However, the issuance of lower dividend preferred stock was dramatically rising in 2020, as 2020 was the only other year in the last decade to have the bulk of issuance come with lower dividends (see table).

With a record-breaking year, all of the other dividend ranges were actually trending lower in 2021 in terms of new issues – not merely in terms of a percentage, but in terms of the actual dollar volume, with the exception of new issues that priced with a 7% to 7.99% dividend.

Nuveen is anticipating “net supply (new issue less redemptions) in the preferred market will be relatively flat for the foreseeable future,” according to a recent opinion piece regarding preferreds.

Preferred stock indexes

Preferred stock indexes for the year were modestly positive.

The S&P U.S. Preferred Stock index was up less than 1% year to date.

The BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities index was closing out the year with a 2.41% return.

Returns on the Wells Fargo Hybrid & Preferred Securities Financial index were a little higher, charting just above 3%.

Best-performing ETF

In spite of the low dividends, the best-performing preferred stock ETF, the Virtus InfraCap U.S. Preferred Stock ETF, did manage to shore up its portfolio with offerings from 2021.

Currently, the largest holding for the ETF is South Jersey Industries’ 8.75% $50-par equity units, which priced in mid-March with a three-year tenor.

The fund, which is up more than 20% for the year, relies on dividends from its top 10 holdings that are at a minimum above the 5.75% mark.

In the last quarter of the year, the top 10 list for the ETF changed as DigitalBridge Group, Inc. redeemed its series H preferreds.

In spite of thinner supply in the high-dividend arena, the ETF managers replaced that stake with another high-dividend issue from 2021, Babcock & Wilcox Enterprises Inc.’s series A cumulative perpetual preferred stock that came with a 7.75% dividend.

Banks

The best-performing ETF failed to include any issues from the biggest issuers of 2021: banks.

In a recent opinion piece that focused on preferred securities, Douglas Baker and Brenda Langenfeld from Nuveen point out that “Financial institutions now make up most of the preferred universe.”

“Since 2008, banks and brokerage firms (U.S. and international) have issued preferreds en masse to replenish capital depleted by housing and subprime losses during the financial crisis,” they continued.

The five largest issues of 2021 fell into the category of banks and brokerage firms.

The largest single tranche of preferred stock that Prospect News has ever tracked came in January of 2021 from Wells Fargo & Co. as a $3.51 billion 3.9% series BB reset non-cumulative preferred stock issue.

The next four largest tranches for the year were from: Citigroup Inc. ($2.3 billion), Charles Schwab Corp. ($2.25 billion), JPMorgan Chase & Co. ($2 billion) and Deutsche Bank AG, New York Branch ($1.75 billion).

2022 recommended buy

Preferreds are a preferred and recommended asset class, as they are areas where investors should “lean into areas where lower credit quality and solid fundamentals overlap in fixed income,” according to Nuveen Asset Management, LLC’s 2022 Outlook.

Wells Fargo’s Investment Institute agrees in its 2022 Outlook. The bank points out that credit spreads remain below long-term averages for investment-grade and high-yield corporate bonds. Investors are still seeking yield and are willing to take on some credit risk. Wells Fargo says that “the healthy growth environment” will sustain the appetite for credit risk. Preferred securities would be a good place, with leveraged loans, for risk appetite. One advantage of preferred securities is that they allow investors to “maintain exposure to fixed-income assets.”

Fidelity thinks that preferred stock looks attractive as one of the risks for 2022 is a continuing rise in interest rates and floating-rate preferred stock looks better than a fixed-rate bond, Adam Kramer said in an outlook piece at the beginning of December.

Morgan Stanley Research forecasts that inflation in major markets will “peak then retreat” by more than two percentage points over the course of 2022.

In terms of risk, “Credit spreads widening is a risk for preferreds, but massive credit spread widening seems unlikely given the general reopening momentum and current inflationary trends,” according to a 2022 Outlook piece from Global X Management Co., LLC.

Nuveen pointed out that preferred stock does well during “periods of gradually increasing interest rates, as credit spreads tighten during periods of rising rates.”

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.