For the last quarter of 2019, a total of 10 fixed-rate preferred stocks were issued with a nominal yield of below the 5% threshold. This has become the norm now, and the first preferred stock for 2020 just confirms it. Something that had only happened once for the last 3 years (GDL-C in March 2018). In this article, we want to shed light on the newest 4.75% Preferred Stock issued by MetLife (MET).
The New Issue
Before we submerge into our brief analysis, here is a link to the 424B5 Filing by MetLife, Inc – the prospectus.
For a total of 40M shares issued, the total gross proceeds to the company are $1B. You can find some relevant information about the new preferred stock in the table below:
MetLife, Inc. 4.75% Non-Cumulative Preferred Stock, Series F (NYSE: MET-F) pays a qualified fixed dividend at a rate of 4.75%. The new preferred stock has a ‘BBB” Standard & Poor’s rating and is callable as of 03/15/2025. Currently, the new issue is trading above its par value at a price of $25.55, which translates into a 4.65% Current Yield and a YTC of 4.40%.
Here’s how the stock’s YTC curve looks right now:
MetLife, Inc. is a provider of life insurance, annuities, employee benefits and asset management. The Company’s segments include U.S.; Asia; Latin America; Europe, the Middle East and Africa (EMEA); MetLife Holdings, and Corporate & Other. Its U.S. segment is organized into Group Benefits, Retirement and Income Solutions and Property & Casualty businesses. Its Asia segment offers products, including life insurance; accident and health insurance, and retirement and savings products. Latin America offers products, including life insurance, and retirement and savings products. Life insurance includes universal, variable and term life products. EMEA offers products, including life insurance, accident and health insurance, retirement and savings products, and credit insurance.
Source: Reuters.com | MetLife, Inc
Below, you can see a price chart of the common stock, MET:
MET’s dividend distribution has been rising for the past several years (from $1.01 in 2013 to $1.74 in 2019). With a market price of $52.64, the current yield of MET is at 3.30%. As an absolute value, this means it has more than $1.65B in yearly dividend expenses for the common. For comparison, the yearly dividend expenses for all outstanding preferred stocks (with the newly issued Series F Preferred Stock) of the company is around $227M.
In addition, with a market capitalization of around $48.16B, MET is the fourth largest “Life Insurer” listed on the New York Stock Exchange and also the largest U.S. one (according to Finviz.com).
Below you can see a snapshot of MetLife’s capital structure as of its last quarterly report in September 2019. You can also see how the capital structure evolved historically.
Source: Morningstar.com | Company’s Balance Sheet
As of Q3 2019, MET had a total debt of $16.73B ranking senior to the newly issued preferred stock. The new Series F Preferred shares rank junior to all outstanding debt and equal to the other outstanding preferred stocks, which total $3.34B.
The Ratios Which We Should Care About
Our purpose today is not to make an investment decision regarding the common stock of MET but to find out if its new preferred stock has the needed quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.
- Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.
- Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:
- Market Cap/(Long-term debt + Preferreds): This is our main criterion when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 48,160/(16,730 + 4,340) = 2.29, indicating the company is well-capitalized, as its equity is more than enough to cover all its debt and preferred stocks.
- Earnings/(Debt and Preferred Payments): This is also quite an easy-to-understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the TTM financial results is 7,380/(990 + 227) = 6.10, also indicating a significant buffer for the preferred stockholders and the bondholders so to be calm about the payments. Moreover, the company manages to pay $1.65B dividend expense for its common which is junior to its liabilities.
The MetLife Family
MET has four more outstanding preferred stocks:
- MetLife, Inc. Floating Rating Non-Cumulative Preferred Stock, Series A (MET.PA)
- MetLife, Inc. 5.250% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C, with a liquidation preference of $1,000 per share.
- MetLife, Inc. 5.875% Non-Cumulative Preferred Stock, Series D, with a liquidation preference of $1,000 per share.
- MetLife, Inc. 5.625% Non-Cumulative Preferred Stock, Series E (MET.PE)
only 2 of which are listed on the NYSE, MET-A and MET-E.
MET-A pays a qualified floating dividend at a rate of the Three-month LIBOR plus 1.00% but not less than 4.00%. At this point, the Three-month LIBOR interest rate is at 1.84%, which means that the current Nominal Yield of MET-A is at its minimum at 4.00%. Currently, the Series A Preferred Stock is anytime callable and trades at its par value, at a price of $24.88, having a Current Yield of 4.02%. MET-E pays a qualified fixed dividend at a rate of 5.625%. It is callable as of 06/15/2023 and with the price of $27.58 it has a 5.10% Current Yield and a 2.62% YTC.
If we compare the newly issued MET-F with the Yield-to-Worst (equal to its Yield-to-Call) of 4.40%, it is currently the best issue in the family. It has almost 2% higher YTW than the other fixed-rate preferred stock, MET-E, and also 0.40% better YTW than the floater one, MET-A. However, what is specific about MET-A is that its Current Yield is actually the worst return one can get.
In addition, in the following chart, you can see a comparison between MET’s preferred stocks and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF).
Furthermore, there are plenty of Corporate Bonds issued by the company and the picture below presents it:
For my comparison, I choose a fixed-rate bond with the closest maturity date as the call date of MET-F, the 03/01/2025 Corporate Bond.
MET4218547, as it is the FINRA ticker, is rated an ‘A-‘ and has a Yield-to-Maturity of 2.069%. This should be compared to the 4.40% Yield-to-Call of MET-F, but when making that comparison, do remember that MET-F’s YTC is the maximum you could realize if you hold the preferred stock until 2025. This result is a yield spread of around 2.33% between the two securities, which can be justified by the higher rank in the capital structure and the higher credit rating of the Bond.
The chart below contains all preferred stocks in the “Life Insurance” sector (according to Finviz.com) regardless of the dividend rate they pay, which has a par value of $25, by their Yield-to-Call and Current Yield. It is important to take note that, except for AEL-A, all of these preferred stocks are rated with an investment-grade rating by Standard & Poor’s.
Take a look at the full list:
All ‘BBB’ Preferred Stocks
The last chart contains all preferred stocks that pay a fixed dividend rate, have a par value of $25, a ‘BBB’ Standard & Poor’s rating and a positive YTC.
Redemption after the Occurrence of a Rating Agency Event or Regulatory Capital Event:
Series F Preferred Shares are redeemable, in whole but not in part, at any time prior to March 15, 2025, within 90 days after the occurrence of a “rating agency event” or “regulatory capital event” (as defined in the Preliminary Prospectus), at a redemption price equal to (‘I’) in the case of a rating agency event, $25,500 per Series F Preferred Share (equivalent to $25.50 per Depositary Share), plus an amount equal to any accrued and unpaid dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date or (‘II’) in the case of a regulatory capital event, $25,000 per Series F Preferred Share (equivalent to $25 per Depositary Share), plus an amount equal to any accrued and unpaid dividends per share that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date.
Source: FWP Filing by MetLife, Inc.
Use of Proceeds
We expect to receive net proceeds from this offering of approximately $972 million, after the underwriting discount and estimated expenses. We intend to use the net proceeds from this offering for general corporate purposes, which may include the redemption or repurchase of MetLife, Inc.’s 5.250% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series C.
Source: 424B5 Filing by MetLife, Inc
Addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index
With the current market capitalization of the new issue of around $1B, the newly issued preferred stock is a potential addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index during some of the next rebalancings. It will also be included in the holdings of the main benchmark, PFF, which is the ETF that seeks to track the investment results of this index, and which is important to us due to its influence on the behavior of all fixed-income securities.
The company has very good financials in terms of fixed income investors, having 2.3x times more equity than liabilities and is paying 7x times more dividends on its common stock than all of its outstanding preferred stocks that are standing above in the capital structure. So, here the credit risk is absolutely out of the table. Despite its lower nominal yield, it has the highest YTW from the family. Despite the lack of many issues, along with AEL-A, the same is also observed in the comparison with all other preferred stocks in the sector. MET-F is also the second-best preferred stock, after PSB-Z, from these that have the same rating of “BBB.” However, its current yield is one of the lowest both in the sector and with the “BBB” rated ones.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.