Friday, June 11, 2010

SLCG Research: Preferred Stock Portfolios

SLCG released today ‘The Risks of Preferred Stock Portfolios’.

Preferred stocks have characteristics similar to both debt and equity. Like debt, preferred stocks make fixed or floating dividend payments similar to coupon payments of debt. Like equity, the dividend payments are not an obligation of the issuer and a failure to make dividend payments does not constitute a default. Holders of preferred stocks have claims on the income and assets of the issuing company before common equity holders and after debt holders.

In this paper, we find that when an issuing company is financially healthy, preferred stocks behave similarly to debt, but when the company’s financial condition deteriorates, preferred stocks behave more similarly to equity. We use the case of Fannie Mae 2008 issuance to illustrate this finding. Furthermore, we show that the financial services firms are heavy issuers of preferred stocks, which means that investors who hold a portfolio of preferred stocks are exposed not only to the risk of its equity-like character under financial distress but also to industry concentration risk.

No comments:

Post a Comment

Please keep comments appropriate. Malicious comments or solicitations will be removed.