MicroStrategy Preferred Stock Debuts on Nasdaq With Attractive 9% Yield — Barrons.com

Andrew BaryMicroStrategy's new convertible preferred stock is yielding more than 9% after rallying from its offering price.The shares, which began Nasdaq trading Thursday under the ticker STRK, were at $85.50 in mid morning, up from the deal price of $80 set last week. The offering settled Wednesday.The company, the world's largest corporate Bitcoin holder, issued 7.3 million shares of the 8% preferred stock as part of a strategy to diversify its funding sources as it continues to add to its cryptocurrency investments. The deal raised $563 million after commissions to the underwriting group and other expenses.MicroStrategy originally planned to sell the preferred at its face value of $100 a share. Weak demand prompted a sharp price cut to $80, which resulted in a 10% yield to the initial buyers.It turns out that yield was too high. The current yield of 9.35% — a Barron's calculation — compares favorably with the yields of less than 6% on many preferred issues from banks. Yields on junk bonds average 7.5%. The deal size was boosted from $250 million.The company said Wednesday that it plans to do business as Strategy.The preferred also has a conversion feature, which is now out of the money, giving holders a perpetual right to swap each share for a tenth of a share of common stock. The common shares were at $335 on Thursday; for holders to make a profit by converting their preferred, the price would have to rise to about $855.Still, the conversion option has some value. The way convertibles work is that the price would rise as the common stock rallies significantly and approaches $855. Most preferreds have no such feature.There are no current ratings on MicroStrategy from major credit-rating companies, but Moody's rated the company single-B3, a junk-grade rating, before withdrawing that call last fall. Payments on the company's dividend aren't funded from conventional earnings because its software business generates little free cash flow and the Bitcoin holdings yield nothing.But the company has huge asset coverage of its debt and preferred stock. The Bitcoin holdings, some 471,000 coins, are valued at around $46 billion with Bitcoin around $98,000. That compares with debt of $6 billion and the more than $500 million of preferred stock. That coverage is about seven to one.In a presentation accompanying its earnings report Thursday, MicroStrategy said it had 750 years of dividend coverage for the preferred dividends of $8 per share annually, or about $58 million annually, based on the value of its Bitcoin holdings. The company said it would have 100 years of dividend coverage if Bitcoin fell 75%,The company does have the right to pay the dividends in common stock, but intends to pay them in cash. There is some question about whether the dividend will be taxed like common stock dividends or be deemed a return of capital.Still, the preferred offers a high yield and considerable asset coverage, as well as giving investors some exposure to Bitcoin. The company says it may issue more of it in the future.Write to Andrew Bary at [email protected] content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.