Citigroup Issues New Preferred Shares at 7%, While Morgan Stanley Sells Its Deal at 6.625%

In recent weeks, both Citigroup and Morgan Stanley have launched substantial preferred stock offerings, signaling a strategic move amidst a dynamic financial landscape characterized by fluctuating interest rates and evolving investor preferences.

1. Citigroup’s Preferred Stock Offering
   • Details: Citigroup has recently issued $1.5 billion worth of preferred stock with a 7% dividend yield. Each share was priced at $1,000. This offering, known as Series DD, is traded over-the-counter (OTC) rather than on major stock exchanges like the NYSE.
   • Market Performance: The preferred stock from Citigroup has been performing well in secondary markets. It is currently trading at $101.50, surpassing its initial offer price of $100. This strong performance reflects investor confidence and demand. Notably, Citigroup’s Series DD issue is scheduled to settle on Tuesday.
   • Historical Context: This offering is Citigroup’s third major preferred stock issuance this year. Earlier in 2024, the bank raised $550 million with 7.2% preferred stock in February and $1.75 billion with 7.125% preferred stock in May. With the addition of this latest issue, Citigroup has raised $3.8 billion in preferred stock in 2024 alone, making it the top issuer of preferred stock for the year according to UBS data.
2. Morgan Stanley’s Preferred Stock Offering
   • Details: Morgan Stanley has raised $1 billion through a new preferred stock issue with a 6.625% dividend yield. Each share is priced at $25, and the issue is set to be listed on the NYSE under the ticker MS Preferred Q. This offering is scheduled to settle alongside Citigroup’s new issue.
   • Market Performance: The Morgan Stanley preferred stock has been trading near $26, indicating robust investor interest and favorable market conditions. This issue aims to cater to retail investors, providing a more accessible entry point compared to institutional offerings priced at $1,000 per share.

Market Dynamics and Investor Demand

The issuance of these preferred stocks comes at a time when long-term interest rates have recently declined, providing banks with an opportunity to offer new securities at attractive yields. The 30-year Treasury yield, currently around 4.45%, contrasts sharply with the yields offered by these new preferred stock issues, which are in the 6.5% to 7% range. This yield premium makes the preferred stocks particularly appealing to income-seeking investors.

Demand for new preferred stock deals has been strong this year. This demand has been driven by several factors, including reinvestment needs and the redemption of existing preferred issues. Many of these existing issues were “fixed-to-float” securities, which saw increased dividend payments as interest rates rose, prompting investors to seek new issues with favorable yields.

Features and Risks of the Offerings

1. Citi’s Offerings:
   • Longer Call Protection: The Citi preferred stock issue offers a notable feature—10-year call protection. This means that Citi cannot redeem the preferred shares for ten years, providing investors with greater stability and potential for capital appreciation. This is in contrast to the typical five-year call protection offered by many preferred stocks, including the Morgan Stanley issue.
   • Credit Ratings: The Citi issue is expected to carry lower credit ratings compared to Morgan Stanley’s offering. Specifically, it is anticipated to receive Ba1 from Moody’s and BB-plus from S&P, while Morgan Stanley’s issue is expected to be rated Baa3 by Moody’s and Triple-B-minus by S&P. The lower credit ratings for Citi’s issue are reflective of the higher risk perceived by investors, which is compensated by the higher yield.
2. Morgan Stanley’s Offerings:
   • Retail Focus: Morgan Stanley’s preferred stock is priced at $25 per share, making it more accessible to retail investors compared to the institutional $1,000 per share offerings. This approach allows individual investors to participate more readily in preferred stock investments, which typically appeal to those seeking stable income streams.

Tax Considerations

Preferred stock dividends are generally tax-advantaged, similar to common stock dividends. However, there are some issues related to the treatment of these dividends for tax purposes. For instance, pricing services sometimes misclassify preferred stock dividends as bond interest, which can lead to higher tax liabilities for individual investors. It is crucial for investors to verify the tax treatment of their dividends with their brokerage firms or directly with the issuers to avoid unexpected tax consequences.

Broader Market Context

The recent preferred stock offerings by Citigroup and Morgan Stanley reflect broader trends in the financial markets. The strong demand for high-yield securities and the strategic issuance of preferred stock by major financial institutions highlight the ongoing search for yield in a low-interest-rate environment.

Investors should be aware of the associated risks with preferred stocks, including credit risk and market volatility. Preferred stocks, while offering attractive yields, can be affected by fluctuations in interest rates and changes in credit ratings. The performance of these securities is often closely tied to broader economic conditions and the financial health of the issuing institutions.

For those interested in these investment opportunities, staying informed about market conditions and consulting with financial advisors can help in making well-informed decisions. The evolving landscape of preferred stock investments underscores the importance of understanding both the benefits and risks associated with these financial instruments.