SiriusPoint (SPNT): Bargain 8% Preferred Stock With Best Protection Against Rising Rates (2024)

Co-produced with Preferred Stock Trader

(This article was first published to HDO subscribers on July 13th, and all data is from that date.)

SiriusPoint Ltd.

Property/casualty insurer SiriusPoint Ltd. (NYSE:SPNT) was formed in February of this year as a result of a merger between Third Point Reinsurance and Sirius Group. Here is what Yahoo Finance says about the company:

SiriusPoint Ltd. provides specialty property and casualty reinsurance products to insurance and reinsurance companies worldwide. It underwrites homeowners' and commercial, workers' compensation, personal and commercial automobile, mortgage, and multi-line reinsurance products; professional, transactional, and general liability reinsurance products; and cyber, marine, travel, and extended warranty reinsurance products.

The preferred stock, symbol SPNT-B (SPNT.PB), was created as a result of this merger for former Sirius Group preferred stockholders. Eight million preferred shares were created and at least 5 million shares are currently being sold by underwriters for current holders of SPNT-B. These preferred shares are not being sold by the company. Both Fitch and S&P give SPNT an investment-grade credit rating.

SiriusPoint Ltd. 8.0% Series B Resettable Cumulative Perpetual Preferred Stock

SPNT-B is called a “resettable” preferred stock. We have now seen a number of “resettable” preferred stocks issued during the past year. Previously, preferred stocks that have adjustments to their dividends on their call date were adjusted based on LIBOR. With LIBOR going away, this is likely the trigger for issuing these resettable preferred stocks whose dividends are adjusted based on the generally higher yielding 5-year Treasury Note.

Like fixed-to-floating rate preferreds based on LIBOR, resettable preferreds start out as fixed-rate preferred stocks. Then on their call date, if the stock is not called, its dividend is adjusted to equal some fixed-rate plus the yield on the 5-year Treasury Note. The adjustment or call date is generally 5 years after the issuance of the preferred stock. Once 5 years have passed and the first adjustment is made, future dividend adjustments will only be made once every 5 years.

In the case of SPNT-B, if it is not called on its first call date in 2026, the dividend will be adjusted to be equal to 7.3% plus the yield on the 5-year Treasury Note at the time the adjustment is made. This extremely high adjusted yield is much higher than any other qualified dividend-paying preferred stock from an investment-grade company.

Here are the important details on SPNT-B:

• Current Price: $28.19 (July 11, 2021)
• Current Stripped Yield: 7.2%
• Yield-To-Call: 5.2%
• Call or Dividend Adjustment Date: 2/26/2026
• Adjustment Formula: 7.3% plus the yield on the 5-year Treasury Note
• Qualified Dividend: Yes
• Cumulative: Yes
• Credit Rating: BB+ by S&P and also BB+ by Fitch
• Approximate Next Ex-Dividend Date: August 13, 2021

Note that the dividend on SPNT-B is qualified for the lower 15% tax rate (for a small number of readers in very high or low tax rates, it may be different than 15%). The nice tax break that SPNT-B gets on its dividends provides a higher after-tax yield than other fixed-income securities that pay interest or a non-qualified dividend at the same yield.

SPNT-B Is Very Underpriced

Those who mostly invest in higher-yielding but lower-quality preferred stocks may not realize just how low interest rates are on preferred stocks from higher-quality, low-credit-risk companies. Companies with low credit risk tend to follow Treasury yields. The charts below demonstrate just how undervalued SPNT-B is relative to other fixed-to-floating rate preferred stocks with a BB+ credit rating.

Source: Author

The above chart represents all fixed-to-floating rate preferred stocks that pay qualified dividends and are rated BB+ by S&P. The Y-axis represents “current stripped yield” while the X-axis shows YTC (yield-to-call). As can be seen, SPNT-B is in the upper right-hand corner with a YTC and a current yield that is in a league by itself among BB+ rated preferred stocks. This is a graphical representation of the significant under-valuation of SPNT-B in this market. Below is a chart of the yield metrics of all of the preferred stocks in the above chart.

Source: Author

The above chart is sorted in the order of highest to lowest YTC. For stocks selling so much above their $25 call price, YTC is the best metric of what you are likely to earn. Even if some of these stocks are not called on their call dates, they will likely not trade much above their $25 call price due to fear of an imminent call.

1. Morgan Stanley (MS) preferred stock I, MS-(MS.PI) represents the median YTC at 1.32% versus 5.2% for SPNT-B. One thing to notice is that generally the further out the call date, the higher the YTC, with the exception of SPNT-B. This is unsurprising as bonds with shorter maturities also pay lower yields than longer-term bonds.
2. If we look at the two preferred stocks that, like SPNT-B, are callable in 2026 they are KeyCorp DEP SHS 1/40 E (KEY.PI) and People's United Financial Preferred (PBCTP). Those have YTCs that average only slightly above 2%. So without even looking at the floating rate formulas of each preferred stock, SPNT-B is extremely mispriced.
3. If you look at the column marked “Specific”, you will see the eventual floating rate of each preferred stock. On its call date, the yield on SPNT-B will adjust to 7.298% plus the yield on the 5-year Treasury Note while all of the others adjust to LIBOR plus somewhere between 3.09% and 4.32% (based on par). So if these were to all convert to their floating rate at current interest rates, SPNT-B would carry a yield of over 8% versus the LIBOR floaters which would average a yield of less than 4%. Historically, the 5-year Treasury Note provides a higher yield than LIBOR.

And what happens if rates rise 2% on LIBOR and the 5-year Note between now and the call dates of these preferred stocks. Let’s look at KEY-I, with a similar call date to SPNT-B. While SPNT-B’s yield would rise to 10.1% from its current 8% nominal yield (yield at par), KEY-I’s yield would not rise from its nominal yield and would carry a much lower yield at 6.1%.

Once underwriters are finished selling their shares of SPNT-B, we expect it to move much higher in price. With KEY-I currently trading at $30.52, and much higher-yielding SPNT-B trading at $28.19, you can see how mispriced SPNT-B is and how much room it has to move higher in price.

Now let’s take a look at BB+ fixed-rate preferred stocks and see how they compare to SPNT-B.

Source: Author

As can be seen from the bubble chart above, Enstar Group Limited 7% preferred E (ESGRO) is the only fixed-rate preferred stock that has a current yield anywhere near SPNT-B, but its YTC is only 2.9%. And these fixed-rate preferreds provide no protection against higher interest rates like SPNT-B does. And if interest rates fall to zero, when SPNT-B floats, it will still have a yield of 7.298% on par versus around an average of 5.3% for these fixed-rate preferred stocks.

Source: Dreamstime

Fair Value for SPNT-B Is $32.00 Per Share

Using KEY-I as the best comparable preferred stock, SPNT-B would carry the same YTC at $32.00 as KEY-I does at its current price. And at $32.00, SPNT-B would still have a 6.3% stripped current yield versus KEY-I at 5.04% and SPNT-B would still carry a far superior floating rate formula to KEY-I. So one could say that this is actually a conservative estimate.

Would we hold this stock until it hits $32.00 per share? I doubt it. We don’t want to buy KEY-I at $30.54 and we would likely be quite happy if we could exit SPNT-B at $1.00 below fair value at $31.00.

SPNT-B 4-Month Price Target

We believe that once underwriters finish their selling that SPNT-B will move up price rather quickly to a more fair value level. We are targeting a price of $30.50 over the next 4 months. We would also net two dividends during that period. Thus, the expected total return on SPNT-B over four months is expected to be 11.7% which annualizes to a 35% total return.

SPNT-B Looks Much Like WCC-A When It IPO'd

The IPO of SPNT-B reminds us very much of the IPO of WESCO International Preferred “A” stock (WCC.PA) which we recommended in an article back in September of 2020. It was trading at around $28.00 at the time the article came out and has since traded above $32.00 per share. It now sits at $30.65 having gone ex-dividend 66 cents recently. The similarities are striking to SPNT-B.

Both SPNT-B and WCC-A were preferred stocks created as a result of a merger. Both were given extremely strong yields and floating rate formulas to satisfy the parties in the merger who would receive these preferred stocks. The floating rates and current yields were much higher than would have been offered if these were normal IPOs to the public rather than creations to close a merger. Both were grossly undervalued when they hit the market, and in both cases, the owners of these preferred stocks did not understand how undervalued they were.

In the case of WCC-A, as soon as it went public, holders of WCC-A proceeded to dump their shares simply wanting to cash out and run with the profits they made as a result of the merger. In the case with SPNT-B, 8 million shares were created and holders of at least 5 million of these shares simply want to cash out and sell their preferred shares. And history shows what a mistake the sellers made.

Once those who simply wanted to cash out finished selling, WCC-A proceeded to rise from $28.00 to $31.00 in just 2 months as the chart below shows. We expect that once underwriters finish dumping their 5 million shares that SPNT-B will follow the same pattern but maybe not as high as $31.00 and maybe not as quickly. Although WCC-A has a higher coupon and a higher reset rate than SPNT-B, SPNT-B has a credit rating that is some notches above that of WCC-A and has a current YTC that is higher than that of WCC-A.

Source: Etrade

Besides the catalyst that we expect from the completion of underwriters dumping their shares, the large iShares Preferred and Income ETF (PFF) will almost certainly be buying large amounts of SPNT-B at the end of July.

Summary/Conclusion

Preferred stock SPNT-B is a new, and quite undervalued, “qualified dividend”-paying preferred stock from an investment-grade property/casualty insurance company, SiriusPoint Ltd. Like preferred stock WCC-A, SPNT-B was created as a result of a merger where merger participants received incredibly generous preferred stock but simply wanted to sell, cash out and lock in their gains, not understanding the value of the preferred stock that they now owned. Once new and disinterested holders of WCC-A finished selling, these preferred shares quickly soared higher and at one point reached a price of over $32.00 per share. We expect SPNT-B to follow suit and ultimately trade to a price closer to $31.00. We calculate relative fair value at $32.00 per share.

SPNT-B was IPO’d with an 8.0% yield at par and a reset rate of 7.298% plus the yield on the 5-year Treasury Note in 2026 when the rate is reset. As the article demonstrated, BB+ rated SPNT-B is very undervalued relative to other “qualified dividend”-paying BB+ rated preferred stocks. Its YTC, current yield, and reset rate are vastly superior to its peers including BB+ fixed-rate preferred stocks.

Due to its enormous reset rate, SPNT-B provides extraordinary protection against higher interest rates in the future. But it will also perform extremely well if rates stay the same or fall. Due to its high floor, even if rates on the 5-year Treasury Note go to zero, SPNT-B’s rate will reset to 7.298% which will be an extraordinary yield for a low-credit-risk preferred stock with the 5-year Treasury yield at zero.

We feel that SPNT-B is a winner for long-term conservative investors due to its outsized relative yield, BB+ rating, and interest rate protection, but also a winner for those who are more trading oriented and would be very pleased to grab a $2.00 capital gain in a very short time frame.

The combination of low credit risk, an oversized relative yield, and a preferred stock that should perform extraordinarily well in any interest rate environment makes SPNT-B a strong core holding for any fixed-income portfolio. There is no other preferred stock in the market, from an investment-grade company, that has yield metrics and a floating rate as good as SPNT-B – at least that we are aware of. We are open to suggestions from readers who think they have found a better one.