Qurate Retail Preferreds: Earn Over 7.5% Yield Investing Alongside John Malone

Summary

8% coupon paper with a 2031 maturity date, VERY UNUSUAL FOR A PREFERRED CLASS.

Dividends are qualified for tax purposes.

John Malone owns 6.75% of the issue, equal to over $85 million worth.

Balance sheet in great shape at around 2x net leverage and around 3.0x leverage through these preferred shares.

Ben Gabbe/Getty Images Entertainment The Company:

Qurate Retail Inc. ( QRTEA ) is a video and digital commerce company comprised of a number of retail properties including QVC, HSN, Zulily and a host of legacy catalog retailers/etailers. Source: Qurate October Presentation

While a lot of people might kneejerk assume that QVC/HSN is a dead business, the results prove otherwise. The company’s customer base is remarkably stable and loyal both domestically and internationally. The company grew that base wildly last year while many other retail outlets were closed and that base remains higher than 2019.

QVC Customer Frequency and Value source Qurate October Presentation

QVC Customer Growth Vs 2020 and 2019 source Qurate October Presentation

That customer base is also skewing younger.

QVC Customer Age Cohort source Qurate October Presentation

The strength of the customer base results in extremely stable OIBDA (Operating Income Before Depreciation and Amortization), prodigious cash flows, excess liquidity, and a strong balance sheet.

Qurate OIBDA, Liquidity and Leverage as of 6/30/21 (numbers are largely unchanged as 9/30/21) source Qurate October Presentation The Preferred Shares:

John Malone has an incredible understanding of the US tax code and has utilized it to his advantage (and that of the shareholders in his various entities) better than any other executive I have ever seen. These preferred shares are the epitome of a John Malone smart tax move and one that he and other associated executives participated in. QRTEA has been a steady $700-$800 million cash generator for the past couple of years. It has steadily reduced debt and bought back stock in lieu of paying dividends.

The company paused its stock buybacks early in 2020 given Covid uncertainty. However, the company’s business exploded during 2020 by the middle of Q3 2020, the company found itself swimming in cash. It declared a $1.50 special dividend to shareholders and simultaneously issued these 8% preferred shares ( QRTEP ) as another special dividend equal to $3/share. Chairman Greg Maffei explained the rationale behind the preferred on the Q2 2020 conference cal l: Our historical buybacks have not been as successful as we’d like, largely due to the markets’ more negative outlook of Qurate Retail’s terminal value. While our view may differ, our management and Board looked at and explored alternative approaches for return of capital to deliver sustained benefits to shareholders. Given the strength in Qurate’s free cash flow and our confidence in this business fundamentals, we intend to return capital to shareholders via a special dividend consisting of two pieces: a one-time cash dividend of $1.50 a share; and a preferred stock dividend of $3 a share. The proposed one-time cash dividend will total approximately $633 million, and we arrived at this amount in reviewing the projected 2020 free cash flow, the expected proceeds from the sale of our Solana green energy asset and cash built in part from our pause in share buybacks over the past year. This could be important also because — in terms of having this dividend now because it might be optimal timing in the event tax rates increase in the coming years. The proposed preferred stock dividend will have a total base of approximately $1.3 billion. Why did we choose a preferred stock dividend? Well, effectively, we’re dividing Qurate’s common stock into a more bond-like instrument and a more levered common equity. In line with many of the other things we’ve done, in terms of providing investor choice, this should increase investor choice as well as much as our tracking stock and spincos have done. These preferred shares are structured on extremely advantageous terms to holders including: They have a fixed maturity date of March 2031 instead of a perpetual structure.

The shares are non-callable until 2025 and only at 104 then and are not callable at $100 until 2027.

Dividends are cumulative and get qualified dividend treatment for tax purposes.

If the company fails to pay dividend, the dividend rate increases for two quarters, preferred holders get a board seat. It is a large ~$1.26 billion issue that is exchange-traded so easy to buy and sell. The terms are so attractive to holders that John Malone and Greg Maffei took down […]

source Qurate Retail Preferreds: Earn Over 7.5% Yield Investing Alongside John Malone