Outlook 2020: Preferred stocks seen as safe bet in coming year

By James McCandless

San Antonio, Dec. 31 – Coming off a year of losses in the previous year, the preferred stock market sustained a positive trend through 2019.

The Wells Fargo Hybrid & Preferred Securities Financial index saw a year-to-date return of 14.15% halfway through December.

The iShares U.S. Preferred Stock ETF was close behind with a 13.86% year-to-date improvement.

The Invesco Preferred ETF moved similarly, netting a 15.27% gain.

Generally seen as an asset class that performs much like a stock but has the reliability of a bond, preferred securities are gaining steam as a fixed-income option in a broader market that is once again poised for a downturn.

At the midpoint of 2019, the majority of issuance was taken up by the financial sector with 47.2% of the market, followed by insurance companies with 20.9% and industrials with 13.7%.

For the coming year, the Wells Fargo Investment Institute listed preferred stocks among its favored fixed-income sectors as it was one of the highest-performing of the year.

Though it did caution that it is “unlikely that this performance will persist,” analysts said in a note. “We do view the preferred security sector as attractive for investors focused on income generation.”

In an October note, analysts at Nuveen also saw continued merit in investing in preferred securities.

“We still favor non-fixed rate coupon securities, as they can meaningfully reduce potential interest rate risk without sacrificing much return,” the analysts said.

Preferreds maintain rise

At the cusp of 2019, the preferred stock market was bouncing back from a downturn after the Federal Reserve raised interest rates to 2.20% in the back half of the year.

But on three occasions this year, the Fed cut rates until it was back down to 1.50% at the end of October, holding off on further cuts in December.

The Wells Fargo Hybrid & Preferred Securities Financial index has steadied, rising by 0.74% over the last three months.

“There is still a growing view that this is a safe place to generate income,” a trader said. “There is a downside risk that some will be able to tolerate for a regular set dividend.

Issuance rises

Newer preferred stock priced in the last few months of the year bolstered the market’s positive trend.

JPMorgan Chase & Co.’s 4.75% series GG non-cumulative perpetual preferred stock (NYSE: JPMPrJ) was trading in the $25.20 context in mid-December.

The New York-based financial services firm was active with multiple deals this year, pricing the series GG preferreds on Nov. 1, which straddled par in its first few weeks.

Elsewhere in finance, AXA Equitable Holdings, Inc. sold a $725 million offering of series A fixed-rate non-cumulative perpetual preferred stock.

After settling below par at $24.81, the preferreds (NYSE: EQHPrA) crossed the threshold in the first week of December to trade just above $25.00.

More recently, telecom giant AT&T Inc. priced a $1.2 billion issue of 5% series A perpetual preferred stock on Dec. 6.

Still trading on the over-the-counter market as of mid-December (ATATL), the preferreds were pushed below par before working their way into the $25.30 context.

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