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Equitable Holdings Preferred Shares: Still Holding Off Despite Higher Yields (NYSE:EQH)

Equitable Holdings' Preferred Shares: A Cautious Stance Amid Enticing Yields

In the ever-evolving landscape of fixed-income investments, preferred shares often present an intriguing blend of equity-like upside and bond-like stability. A recent analysis delves into the preferred shares of Equitable Holdings, Inc. (NYSE: EQH), a prominent player in the financial services sector, and arrives at a measured conclusion: despite the allure of elevated yields in the current market environment, it's prudent to hold off on diving in. This perspective stems from a careful examination of the company's fundamentals, the specific characteristics of its preferred stock offerings, and broader economic headwinds that could undermine their appeal.

Equitable Holdings, formerly known as AXA Equitable Holdings, operates as a diversified financial services firm with a focus on life insurance, annuities, and asset management. The company rebranded and went public in 2018 after spinning off from the French insurance giant AXA, positioning itself as a key provider of retirement and protection solutions in the U.S. market. Its business model revolves around generating stable fee income from variable annuities and managing a substantial investment portfolio. However, like many in the insurance space, Equitable has faced challenges from volatile interest rates, market fluctuations, and regulatory pressures. The analysis highlights how these factors play into the valuation and risk profile of its preferred shares, which are non-cumulative perpetual preferred stocks designed to offer investors a steady dividend stream.

At the heart of the discussion are Equitable's Series A and Series C preferred shares, traded under the tickers EQH-A and EQH-C, respectively. These instruments carry fixed dividend rates—5.25% for Series A and 4.30% for Series C—making them sensitive to interest rate movements. In a rising rate environment, as we've seen over the past couple of years, preferred shares like these have seen their market prices decline, pushing yields higher to attract buyers. Currently, yields on EQH-A hover around 6.5% to 7%, while EQH-C offers something in the mid-6% range, depending on prevailing prices. These figures are notably higher than what was available just a few years ago, when low interest rates compressed yields across the board. The article posits that this yield expansion could tempt income-focused investors, particularly those seeking alternatives to traditional bonds or CDs in a high-inflation era.

Yet, the author urges caution, emphasizing that higher yields often signal underlying risks rather than unmitigated opportunities. One primary concern is the callable nature of these preferred shares. Both series become callable at par ($25 per share) starting in 2025 for Series A and later for Series C. This feature introduces refinancing risk: if interest rates fall or Equitable's credit profile improves, the company could redeem the shares, capping investor upside and potentially forcing reinvestment at lower rates. Conversely, in a prolonged high-rate scenario, the shares might remain outstanding, but their prices could stay depressed if market sentiment sours on the issuer.

Delving deeper into Equitable's financial health, the analysis paints a picture of a company with solid but not impervious fundamentals. Equitable boasts a market capitalization exceeding $10 billion and generates robust cash flows from its annuity and insurance operations. Recent earnings reports show resilience, with adjusted operating earnings per share beating expectations in several quarters, driven by strong equity market performance boosting variable annuity fees. The company's investment portfolio, heavily weighted toward fixed-income securities, has benefited from higher yields, potentially enhancing net investment income. However, leverage remains a point of scrutiny. Equitable's debt-to-capital ratio sits around 30-35%, which is manageable for an insurer but could become burdensome if economic conditions deteriorate. The article notes that rating agencies like S&P and Moody's assign investment-grade ratings (BBB+ and Baa1, respectively) to Equitable's debt, reflecting confidence in its capital position, but any downgrade could ripple through to preferred share pricing.

Economic uncertainties amplify these risks. The U.S. economy, while showing signs of cooling inflation, faces headwinds from potential recessions, geopolitical tensions, and persistent supply chain issues. For Equitable, a downturn could lead to higher lapse rates in annuities, increased claims in life insurance, or impairments in its investment portfolio—particularly if corporate bond defaults rise. The analysis draws parallels to the 2008 financial crisis, when insurance firms like Equitable's predecessors grappled with asset devaluations and capital strains. Preferred shareholders, sitting below senior debt in the capital structure, would be vulnerable in such scenarios, as dividends could be suspended without accrual (given the non-cumulative feature). This subordination risk is a key reason the author advises against rushing in, even as yields tempt.

Comparisons to peers provide further context. The article contrasts Equitable's preferreds with those from competitors like MetLife (MET) or Prudential (PRU), which offer similar yields but arguably stronger balance sheets or more diversified revenue streams. For instance, MetLife's preferred shares yield around 6-7% but benefit from a higher credit rating (A- from S&P), potentially offering better downside protection. Broader market alternatives, such as high-yield corporate bonds or even REIT preferreds, are also weighed. The analysis suggests that while Equitable's yields are competitive, they don't sufficiently compensate for the issuer-specific risks, especially when Treasury yields have climbed to 4-5%, narrowing the spread premium for riskier assets.

Valuation metrics reinforce this hold-off stance. Using a discounted dividend model, the author estimates that EQH-A and EQH-C are trading at slight discounts to fair value, but not enough to warrant enthusiasm. Factors like implied volatility in the equity markets and Equitable's beta (around 1.2, indicating higher sensitivity to market swings) suggest potential for further price erosion. The article also touches on technical indicators: trading volumes for these preferreds are relatively thin, which could exacerbate price swings during periods of market stress. Investors are reminded that preferred shares, while offering tax advantages (qualified dividends for eligible holders), lack the voting rights of common stock and don't participate in upside growth beyond the fixed dividend.

Looking ahead, the analysis speculates on catalysts that could shift the narrative. Positive developments, such as sustained earnings growth, strategic acquisitions (Equitable has been active in bolt-on deals), or a favorable interest rate pivot by the Federal Reserve, might make these preferreds more attractive. Conversely, negative surprises—like regulatory changes impacting annuity sales or a spike in longevity risks—could push yields even higher, but at the cost of principal erosion. The author stresses the importance of diversification, suggesting that any allocation to Equitable's preferreds should be part of a broader portfolio of income-generating assets, perhaps limited to 5-10% exposure.

In conclusion, while Equitable Holdings' preferred shares dangle the carrot of higher yields in a yield-starved world, the analysis advocates a patient approach. The combination of callable features, economic vulnerabilities, and comparative alternatives tips the scales toward observation rather than action. For conservative investors, the potential rewards may not outweigh the risks, especially in an environment where safer havens abound. This measured take serves as a reminder that in fixed-income investing, chasing yield without due diligence can lead to regrettable outcomes. As markets continue to fluctuate, keeping a watchful eye on Equitable's performance could uncover better entry points down the line, but for now, holding off appears the wiser path.

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Read the Full Seeking Alpha Article at:
[ https://seekingalpha.com/article/4796468-equitable-holdings-preferred-shares-still-holding-off-despite-higher-yields ]