Recommended Preferreds

Transcription

1 Pat McCluskey, Senior Fixed Income Analyst Michael P. White, Fixed Income Analyst Recommended Preferreds May 22, 2018»» Our Recommended Preferreds List consists of issuers that Advisory Services Group (ASG) believes represent an attractive risk/reward profile for new investment. The client risk suitability scale described on page 6 is the guidance for what type of portfolio we believe a particular issuer is suitable for. We shade those suitability categories we feel are most appropriate for holding the preferred securities of each particular issuer.» We recommend that any investor considering a security from the Recommended Preferreds List do so as a portion of a well-diversified portfolio with no undue concentration in a specific issuer or sector. In our view, no single company should represent more than 5% of a fixedincome portfolio.» Wells Fargo Investment Institute (WFII) currently holds a favorable opinion on Preferred Securities on the belief that the preferred sector presents some opportunities to purchase higher coupons that are attractive to income-oriented investors, but that this strategy must be weighed against the interest-rate risk inherent in long maturity or perpetual preferred securities. WFII currently holds an unfavorable opinion on duration positioning and believes that shortening duration in portfolios is an appropriate step in what WFII believes could lead to better risk-adjusted returns over the next 12 months. Please see pages 9-11 of this report for Important Disclosures, Disclaimers & Analyst Certification Offerings listed may not be appropriate for all investors. See pages 6 and 8 for portfolio suitability scale and agency rating Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value

2 ASG's Preferred Securities Recommendations Please see securities highlights befinning on page 3. Security Characteristics Ratings Ratings Tax Considerations Current Yield Yield to Worst Cumulative/Non- Cumulative - Bond Seniority Issuer Symbol Price Coupon S&P Rating ASG Preferrred Securities Recommendations ALABAMA POWER CO ALP.Q $ % 4.97% 5.02% CUMULATIVE A3 BBB NEG NEG No Yes Yes AT&T INC TBB $ % 5.36% 5.38% Sr Unsecured Baa1 *- BBB+ *- - - Yes No No BANK OF AMERICA CORP BAC.B $ % 5.95% 5.84% NON-CUMULATIVE Ba1 BBB- STABLE STABLE No Yes Yes BB&T Corporation BBT.H $ % 5.50% 4.77% NON-CUMULATIVE Baa1 BBB- STABLE STABLE No Yes Yes DTE ENERGY CO DTW $ % 5.48% 5.48% Jr Subordinated Baa2 BBB- STABLE STABLE Yes No No GEORGIA POWER CO GPJA $ % 5.13% 5.18% Jr Subordinated Baa1 BBB NEG NEG Yes No No AMERICAN HOMES 4 RENT AMH.F $ % 6.27% 6.34% CUMULATIVE - BB STABLE STABLE No No No KIMCO REALTY CORP KIM.L $ % 6.14% 6.20% CUMULATIVE Baa2 BBB- STABLE STABLE No No No PS BUSINESS PARKS INC PSB.X $ % 5.71% 5.78% CUMULATIVE Baa2 BBB STABLE STABLE No No No WEBSTER FINANCIAL CORPORATION WBS.F $ % 5.56% 5.64% NON-CUMULATIVE Baa3 BB STABLE STABLE No Yes Yes Moody's Rating Moody's Outlook S&P Outlook NRA Eligible Qualified dividend income Dividend received deduction Issuer Symbol Price Coupon Fixed-to Floating Rate Securities None at this time. Security Characteristics Ratings Tax Considerations Current Yield Yield to Worst Coupon Reset Date Cumulative/Non- Cumulative - Bond Seniority Floater Spread Moody's Rating S&P Rating Moody's Outlook S&P Outlook NRA Eligible Qualified dividend income Dividend received deduction *Prices not live. ** NRA = Non-Resident Alien Accounts ***These securities have fixed coupons until they become callable in If they are not redeemed at par in 2027, the coupon rates will re-price at a spread (see Libor Spread) over the 3-month Libor (London Interbank Offered Rate). Sources: Bloomberg, Thomson One 2

3 Group 1 securities tax advantaged securities. These securities have dividends/interest payments that for U.S. tax purposes constitute: qualified dividend income (QDI) for individual tax payers or the dividends received deduction (DRD) for qualifying U.S. corporations. The securities in Group 1 are not suitable for non-resident alien (NRA) accounts. COMPANY TICKER PRICE COUPON YTM 1 YTW 2 MOODY'S* OUTLOOK S&P* OUTLOOK PORTFOLIO SUITABILITY Alabama Power ALP.Q $ % 4.970% 5.017% A3 NEG BBB NEG 5.00% Cumulative Preferred Conservative Income Callable beginning 10/01/2022 Extraordinary Call (see footnbote 3 on page 5) Alabama Power Company is a regulated electric utility company and a wholly owned subsidiary of the Southern Company. Based on actual generation as measured in kilowatt-hours, Alabama Power derives its electric power from the following sources: Coal (52.5%), Nuclear (22.7%), Oil & Gas (19.5% and Hydro (5.3%). Bank of America Corp. 3 BAC.B $ % 5.95% 5.84% Ba1 STABLE BBB- STABLE Aggressive Income 6.00% Non-cumulative perpetual preferred Callable on/after 5/16/2023 Extraordinary Call (See Footnote 4 on page 5) Bank of America Corp. is a bank holding company whose subsidiaries offer banking, investing, asset management, and other financial and risk-management products and services. The company's subsidiaries also provide mortgage lending, investment banking and securities brokerage services. BB&T Corporaton 4 BBT.H $ % 5.50% 4.77% Baa1 STABLE BBB- STABLE 5.625% Non-cumulative perpetual preferred Conservative Income Callable on/after 06/01/2021 Extraordinary Call (See Footnote 4 on page 5) BB&T Corporation ranks as the nation's 16th largest bank holding company based on total assets, which amounted to more than $220 billion. Headquartered in Winston- Salem, North Carolina, the bank's subsidiaries offer a wide range of banking and trust services for retail and commercial clients. Webster Financial Corporation WBS.F $ % 5.56% 5.64% Baa3 STABLE BB STABLE 5.25% Perpetual Noncumulative preferred Aggressive Income Callable on/after 12/15/2022 Extraordinary Call (see footnote 4 on page 5). Webster Financial Corporation is a bank holding company headquartered in Waterbury, Connecticut. Through its subsidiaries, it provides a wide range of banking services to customers in the northeast from New York to Massachusetts. With over $26 billion in total assets, the company ranks among the nation s 66 largest bank holding companies. Group 2 securities: these are debt and other securities (non-resident alien (NRA) accounts eligible). COMPANY TICKER PRICE COUPON YTM 1 YTW 2 MOODY'S* OUTLOOK S&P* OUTLOOK PORTFOLIO SUITABILITY AT&T Inc TBB $ % 5.36% 5.38% Baa1 *- - BBB+ * % Senior Unsecured Notes due on11/01/2066 Conservative Income Callable on/after 11/01/2022 Extraordinary Call (see footnote 2on page 5). AT&T Inc. (AT&T) is the leading provider of communications and digital entertainment services in the United States and throughout the world. DTE Energy DTW % 5.48% 5.48% Baa2 STABLE BBB- STABLE 5.25% Junior Subordinated Debentures due on 12/01/2077 Conservative Income Callable on/after 12/1/2022 Extraordinary Call (see footnotes 2 and 3 on page 5). DTE Energy Company (formerly Detroit Edison) is a diversified energy company that develops and manages energy-related businesses and services nationwide. Through its subsidiaries, DTE Energy generates purchases, transmits, distributes and sells electric energy in southeastern Michigan. The company also distributes natural gas to 1.2 million customers through DTE Gas (formerly Michigan Consolidated Gas). Georgia Power Co. GPJA $ % 5.13% 5.18% Baa1 NEG BBB NEG 5.00% Junior Subordinated Debentures due on 10/01/2077 Conservative Income Extraordinary Call (see footnotes 2 and 3 on page 5). Callable on/after 10/1/2022 Georgia Power Company (Georgia Power) is an electric utility company whose customers primarily reside in Georgia. The company operates as a wholly owned subsidiary of The Southern Company, one of the largest utility holding companies in the United States. 3

4 Group 3 securities: dividends taxed as ordinary dividend income for U.S. investors these are typically real estate investment trusts (REITS), cumulative preferred securities whose dividends are not suitable for non-resident alien (NRA) accounts. COMPANY TICKER PRICE COUPON YTM 1 YTW 2 MOODY'S* OUTLOOK S&P* OUTLOOK PORTFOLIO SUITABILITY American Homes 4 Rent 5 AMH.F $ % 6.27% 6.34% - STABLE BB STABLE 5.875% Cumulative Redeemable Series F Preferred Shares Aggressive Growth & Income Callable on/after 04/24/2022 Extraordinary Call: Change of Control 5 American Homes 4 Rent is an internally managed real estate investment trust (REIT) for U.S. tax purposes. The company specializes in acquiring, renovating, leasing and operating single-family homes as rental properties. The company is the second largest publicly traded single-family REIT, managing more than 48,000 single-family homes across the U.S. Kimco Realty Corporation KIM.L $ % 6.14% 6.20% Baa2 STABLE BBB- STABLE 5.125% Cumulative Redeemable Preferred Conservative Income Callable beginning 08/16/2022 Extraordinary Call: None Kimco Realty Corporation (Kimco) is one of the nation's largest publicly-traded owners and operators of open-air shopping centers. The company has been in operation for more than 50 years and, as of June 30, 2017, had interests in 511 shopping center properties, aggregating 84.1 million square feet of gross leasable area, located in 32 states, Puerto Rico and Canada. PS Business Parks PSB.X $ % 5.71% 5.78% Baa2 STABLE BBB STABLE 5.25% Cumulative Redeemable Preferred Conservative Income Callable on/after 9/21/2022 Extraordinary Call: None PS Business Parks is a real estate investment trust (REIT) that was incorporated in As of June 30, 2017, it owned 78% of the common partnership units of PS Business Parks, L.P. (the operating partnership). The remaining common partnership units are owned by Public Storage. PS Business Parks L.P owns, acquires and operates commercial properties, primarily multi-tenant flex, office and industrial space. Source: Bloomberg Information as of 5/22/18 unless otherwise noted 1 Yield-to-maturity: the return on a security taking into account the interest rate, length of time to maturity, expected redemption value and price paid. It is assumed that 2 Yield-to-worst: the value of the lowest of all yields to call or the yield to maturity 3 See page 5, group 1 for more information on tax-advantaged dividend 4 See page 5, group 2 for more information on debt and other securities non-resident alien (NRA) accounts eligible 5 See page 5, group 3 for more information on ordinary income taxation - not tax advantaged *See page 8 for Moody's and S&P credit rating definitions Rating Outlooks: Average time frame covered - one year A positive outlook implies that the rating may be raised A negative outlook implies that the reating may be lowered A stable outlook implies that the rating is not likely to change 4

5 Group 1: Tax Advantaged Securities - Dividends Paid amount to qualified dividend income (QDI) for individual U.S. Investors; for qualifying U.S. corporations qualify for the dividends received deduction (DRD). Ticker Issue: Tax Considerations Coupon Deferral ALP.Q Alabama Power NRA No/QDI Yes/DRD Yes Cumulative BAC.B Bank of America Corp. NRA No/QDI Yes/DRD Yes Noncumulative BBT.H BB&T Corporation NRA No/QDI Yes/DRD Yes Noncumulative WBS.F Webster Financial Corporation NRA No/QDI Yes/DRD Yes Noncumulative Group 2: Debt and Other Securities - Interest and/or dividends paid qualify for non-resident alien (NRA) accounts. TBB AT&T NRA Yes/QDI No/DRD No Not deferrable DTW DTE Energy Company NRA Yes/QDI No/DRD No 10 year deferrable GPJA Georgia Power Company NRA Yes/QDI No/DRD No 10 year deferrable Group 3: REIT Dividends - For U.S. taxpayers: individuals, corporations, opartners, and shareholders of pass-through businesses (including REITs) dividends oin qualifying REITs (equity and mortgage REITs) benefit from the 20% deduction. There may be specific income limitations that would prohibit a taxpayer from taking advantage of the deduction. For additional information, please consult your tax advisor. AMH.F American Homes 4 Rent NRA No/QDI No/DRD No Noncumulative KIM.L Kimco Realty Corp. NRA No/QDI No/DRD No Cumulative PSB.X PS Business Parks NRA No/QDI No/DRD No Cumulative Tax Considerations: NRA Yes suitable for NRA accounts (non-resident alien accounts); NRA No not suitable for NRA accounts. QDI Yes dividends are qualified dividend income (QDI) for U.S. tax purposes; QDI No dividends do not constitute qualified dividend income for U.S. tax purposes dividends are taxed as ordinary income; DRD-dividends received deduction for qualifying U.S. corporations only, dividends qualify for the dividends received deduction. Extraordinary call features--footnotes: 1 Make-whole call this security can be called anytime at the issuer s discretion at the higher of par or a makewhole premium (if any) pursuant to the terms of the make-whole call provision. 2 Change in tax law--these are securities that pay interest quarterly such interest is taxed as ordinary income. These debt/other securities are suitable for non-resident aliens (NRAs) accounts. 3 Rating Agency Event following a change in rating methodology by one of the major rating agencies in which an agency changes the amount of equity credit assigned to this particular security, the issuer has the right to redeem the security most often the redemption price is 102% of par; however the Rating Agency Event must occur before the Optional Call Date for it to be valid. 4 Regulatory Event if the applicable regulator does not allow the security to count as Regulatory Capital (such as Tier 1 Capital in the case of U.S. banks) the issuer has the right to redeem the security at par. While the Federal Reserve has requested that perpetual non-cumulative preferred securities be allowed to count as Tier 1 capital, such securities might not be allowed to count as capital under the Basel III accord. If such securities do not qualify as Tier 1 capital under Basel III, the issuer has the right to redeem the security at par. 5 Change of Control. Upon a change of control, issuer has the right to redeem the securities at par; otherwise holder may elect to convert the preferred shares to common. 6 Bermuda Corporate Event. Issuer has the right to redeem the securities at par following a decision to reincorporate (outside of Bermuda). Source: Company prospectus 5

6 Portfolio suitability CONSERVATIVE MODERATE AGGRESSIVE CONSERVATIVE MODERATE AGGRESSIVE CONSERVATIVE MODERATE AGGRESSIVE SPECULATIVE INCOME INCOME INCOME GROWTH & INCOME GROWTH & INCOME GROWTH & INCOME GROWTH GROWTH GROWTH Category 1: ASG views the credit risk as generally appropriate for Category 6: a conservative income investor or an investor with a greater risk tolerance. Category 2: ASG views the credit risk as generally appropriate for Category 7: a moderate income investor or an investor with a greater risk tolerance. Category 3: ASG views the credit risk as generally appropriate for Category 8: an aggressive income investor or an investor with a greater risk tolerance. Category 4: ASG views the credit risk as generally appropriate for Category 9: a conservative growth and income investor or an investor with a greater risk tolerance. Category 5: ASG views the credit risk as generally appropriate for Category 10: a moderate growth and income investor or an investor with a greater risk tolerance. ASG views the credit risk as generally appropriate for an aggressive growth and income investor or an investor with a greater risk tolerance. ASG views the credit risk as generally appropriate for a conservative growth investor or an investor with a greater risk tolerance. ASG views the credit risk as generally appropriate for a moderate growth investor or an investor with a greater risk tolerance. ASG views the credit risk as generally appropriate for an aggressive growth investor or an investor with a greater risk tolerance. ASG views the credit risk as generally appropriate for speculative investors willing to accept unlimited downside risk. We recognize that investors with similar investment objectives may have substantially different risk tolerances. Although all investments involve some degree of risk, including the potential loss of principal, some securities have more risks than others. With a Category 1, we believe the risk of losing money due to a credit event is small, but the potential for gain also appears limited. With a Category 10, the risk of losing money appears much higher, but we believe there is also a greater potential for gain. Our risk opinion on fixed income securities should be used as a guide to the potential credit risk from a particular issuer and structural subordination*. The risk opinion takes into account credit and structural subordination considerations only and does not incorporate risks related to interest rate risk, inflation risks, liquidity risks, call and prepayment risks or other types of security specific risk. The risk opinion is a guide to the risk from a credit perspective only; it does not factor how the security is used within a portfolio. If a security falls into category 4, this does not mean the security is unsuitable for categories 1-3, as an allocation of the security in these categories may be acceptable in a diversified portfolio. Diversification is a key component of portfolio construction, concentration among issuers or sectors expose an investor to added risk. Investors should consider their individual financial condition and ability to evaluate and tolerate the risks of any product before investing. The suitability of the individual security should be reviewed by investors and their Wells Fargo Advisors Financial Advisor to determine whether a particular security is suitable for their portfolios, with full consideration given to existing portfolio holdings. * Structural subordination incorporates where in the capital structure the security ranks. In a default of payment situation securities that have priority typically receive payment prior to security claims that rank lower (subordinate) in the capital structure of the company. 6

7 Credit ratings Investment-grade ratings Moody's S&P Highest possible credit rating principal and interest payments considered very secure Aaa AAA High quality differs from highest rating only in the degree of protection offered to bondholders Aa1 Aa2 Aa3 Good ability to pay interest and principal more susceptible to adverse effects due to changing conditions A1 A+ A2 A A3 A- Adequate ability to make principal and interest payments adverse conditions are more likely to affect ability to service debt Baa1 Baa2 Baa3 Speculative ratings Moody's S&P Issuer faces ongoing uncertainties or exposure to adverse business or economic conditions Ba1 Ba2 Ba3 Greater vulnerability to default, but currently meeting debt-service requirements Judged to be of poor standing and are subject to very high credit risk AA+ AA AA- BBB+ BBB BBB- BB+ BB BB- B1 B+ B2 B B3 B- Caa1 CCC+ Caa2 CCC Caa3 CCC- Likely in, or very near, default with some prospect of recovery of principal and interest These obligations are typically in default with little prospect for recovery C C Bonds in default NA D Methodology The ASG Recommended Preferreds List uses a combination of quantitative screening coupled with a qualitative analysis to identify issuers for inclusion. The initial quantitative screening is done in order to identify issuers that meet certain minimum criteria in terms of valuation and credit characteristics. These criteria include valuation metrics such as option adjusted spread and credit default swap levels, market based information including performance of a company s securities, as well as financial strength measures. Once an issuer is identified as having met certain numerical criteria, an analyst then reviews it for possible inclusion on the Recommended Preferreds List. This qualitative analysis utilizes information received from various resources including, but not limited to, research from affiliated and unaffiliated research correspondents. Current issuers on the Recommended Preferreds List are monitored in the same manner for continued inclusion or deletion. Ca CC What Does A Deletion Mean? Removal of an issuer from the ASG Recommended Preferreds List is an indication that the WFA Fixed Income Analyst team no longer views the issuer s securities as attractive for purchase on a risk/reward basis. That decision could be due to either a change in market valuation or deterioration in the issuer s credit profile. When we remove an issuer from the ASG Recommended Preferreds List, coverage will be reduced and review will be changed from ongoing to periodic. Removal of an issuer from the Recommended Preferreds List, in and of itself, does not connote a sell recommendation. We would also suggest at that time a Financial Advisor review with their clients the security as well as its place in a particular portfolio. 7

8 IMPORTANT DISCLOSURES Wells Fargo Advisors trades or may trade as principal in the preferred securities (or in related derivatives) discussed in this report. Disclosure Information For important disclosure information, please contact: Wells Fargo Advisors Attn: Advisory Services (Disclosure Information) One North Jefferson St. Louis, MO Or call by phone: (888) Please remember to specify the issuer(s) with respect to which you would like to receive disclosure information. ANALYST CERTIFICATION: The Analyst who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject companies and their securities. The Analyst also certifies that he/she has not been, is not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report. Disclaimers Pricing as of May 22, 2018 unless otherwise noted. Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. There are special risks associated with investing in preferred securities. Preferred securities are subject to interest rate and credit risks. Interest rate risk is the risk that preferred securities will decline in value because of changes in interest rates. Credit risk is the risk that an issuer will default on payments of interest and principal. Preferred securities are generally subordinated to bonds or other debt instruments in an issuer's capital structure, subjecting them to a greater risk of non-payment than more senior securities. In addition, the issue may be callable which may negatively impact the return of the security. Preferred dividends are not guaranteed and are subject to deferral or elimination. 8

9 There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets. Diversification cannot eliminate the risk of fluctuating prices and uncertain returns. Duration is a measure used to determine a bond/s or bond portfolio s sensitivity to movements in interest rates. Generally, the longer the duration the more sensitive a bond or bond portfolio is to changes in interest rates. Bond prices fluctuate inversely to changes in interest rates. Long duration bonds are generally more sensitive to interest rate moves. One way for investors to gauge their interest rate risk is to determine the duration of their fixed-income portfolio. If the duration is above an investor s comfort zone, they should look at strategies that can reduce their portfolio duration. The duration calculation can be used by investors to approximate the percentage change in price per 1% parallel shift in the yield curve. For example, the price of a bond with a duration of five years would be expected to rise or fall 5% in price for every 1% decrease or increase in market interest rates. Wells Fargo Advisors research analysts receive no compensation in connection with the firm s investment banking, sales and trading, or principal trading revenues. Analysts may be eligible for annual bonus compensation based on the overall profitability of the firm, which takes into account revenues derived from all the firm s business activities, including its investment banking business, sales and trading, and principal trading. The Advisory Services Group (ASG) of Wells Fargo Advisors works with information received from various resources including, but not limited to, research from affiliated and unaffiliated research correspondents as well as other sources. ASG does not assign ratings to or project target prices for any of the securities mentioned in this report. ASG receives research from affiliated and unaffiliated correspondent research providers with which Wells Fargo Advisors has an agreement to obtain research reports. Each correspondent research report reflects the different assumptions, opinions, and the methods of the analysts who prepare them. Any opinions, prices or estimates contained in this report is as of the date of this publication and is subject to change without notice. 9

10 Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered brokerdealers and non-bank affiliates of Wells Fargo & Company Wells Fargo Clearing Services, LLC. All rights reserved. 10