MicroStrategy Preferred Yields Almost 9.5% After Selloff — Barrons.com

Andrew BaryMicroStrategy's convertible preferred is yielding close to 9.5% Monday after a selloff on news the company may issue as much as $21 billion more of the securities.The MicroStrategy preferred, traded on the Nasdaq under the ticker STRK, was off 8.1% to $85 Monday, a drop of about seven points. The securities now have a yield of 9.4%.MicroStrategy, which does business as Strategy , issued the preferred in early February, selling 7.3 million shares at a price of $80, raising $563 million after fees. The company said early Monday it may issue an additional $21 billion of the preferred through at-the-market offerings.Barron's argued the securities looked appealing in the mid-80s, where they began trading initially before moving as high as 100 in mid- February.The current yield exceeds the yield on many bank and other preferred securities that now are in the 6% range, including securities from Wells Fargo — its 4.75% issue — and a deal from AT&T also with a 4.75% yield. The iShares Preferred Securities and Income ETF trades around $31 for a 6.4% yield.Investors apparently fear the company will potentially flood the market with new preferred securities. The potential additional sale of preferred stock should not have been a surprise since MicroStrategy chairman and controlling shareholder Michael Saylor raised that prospect in a Retailroadshow.com presentation before the deal.The MicroStrategy preferred is an unusual security because it doesn't carry traditional earnings protection for the dividend, now about $60 million annually. Instead, investors could view the security as a Bitcoin-backed preferred with substantial asset coverage.The company has no ongoing earnings — its Bitcoin holdings yield nothing and its small software business isn't profitable on a GAAP basis. This is a key reason for the high yield.MicroStrategy is the largest corporate Bitcoin holder with about 500,000 coins worth $40 billion, based on a Bitcoin price around $80,000. It has about $8 billion of convertible debt and the nearly $600 million of preferred stock — indicating a coverage ratio (Bitcoin divided by debt and preferred stock) of more than four to one.If the company were to issue $21 billion of preferred, its annual dividend burden could approach $2 billion. That prospect unsettles investors given the company's lack of traditional earnings. But the company may not be eager to issue preferred near current levels at a nearly 10% yield and any sales likely would go toward Bitcoin purchases, effectively providing assets to back the preferred. The company has emphasized the huge value of its Bitcoin holdings relative to its annual preferred dividends.The company can pay the preferred dividend in cash or common stock but intends to pay cash.MicroStrategy stock has come down harder than Bitcoin in recent weeks as some premium has leaked out of the stock. Shares are down 11% Monday at $255.31, less than half their November high. It is also near where the stock traded before the Nov. 5 election, which set off a Bitcoin rally due to Donald Trump's crypto-friendly views.The company is valued at around $66 billion, or roughly 1.8 times the value of its Bitcoin holdings, down from a peak of three in late 2024.One advantage of the MicroStrategy preferred is a conversion feature, which is now way out of the money.Investors can convert each share in perpetuity into one tenth of a MicroStrategy common share, now worth $25 per preferred share. The common stock would have to more than triple for the conversion feature to be worth exercising. While out of the money, the conversion feature has some value.The MicroStrategy preferred offers a much higher yield than a recent company convertible bond that carries a zero percent rate.For investors comfortable with crypto, the preferred offers a nice yield and some exposure to Bitcoin.Write to Andrew Bary at andrew.bary@barrons.comThis 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.