Bank of Hawaii's Series B Preferred Shares: A Steady Hand in Rising Rates

In a world where interest rates are on the rise and uncertainty looms over traditional fixed-income assets, investors are increasingly turning to instruments that offer a blend of safety and yield. Among these, Bank of Hawaii's Series B preferred shares (BOH.PRB) stand out. With a fixed dividend rate of 8% and a current yield of 7.75%, these securities present a compelling opportunity for income-focused investors seeking stability in an environment where yields on bonds and bank deposits remain subdued.

The Case for Dividend Stability

Preferred shares are often criticized for their vulnerability to rising rates, as their prices typically decline when rates increase. However, Bank of Hawaii's Series B preferred shares offer a critical advantage: their fixed dividend rate. Unlike floating-rate preferred stocks, which adjust with market rates, BOH.PRB's 8% annual dividend is contractually set, shielding investors from the immediate income erosion that can occur with rate-sensitive instruments.

This stability is further bolstered by the shares' non-cumulative structure. While this means missed dividends are not owed to shareholders, it also reflects the issuer's confidence in its ability to sustain payouts. Bank of Hawaii, a regional banking powerhouse with a strong presence in Hawaii and the Pacific, has demonstrated resilience through economic cycles. Its solid capital ratios (12.74% Tier 1 as of 2024) and consistent dividend track record provide reassurance.

Yield Advantage in a Low-Yield World

The Series B preferred shares' yield of 7.75% is a stark contrast to the 3.95% yield on Bank of Hawaii's common stock (BOH) and many U.S. Treasury notes. This premium reflects investor demand for higher income in an era where savings accounts and short-term bonds offer minimal returns.

But why pay a 3.16% premium to liquidation value ($25.79 vs. $25.00)? The answer lies in the shares' perpetual nature and their call feature. Investors are willing to pay a bit more for the security of an 8% coupon, which becomes increasingly attractive as rates rise. Unlike bonds that mature, BOH.PRB has no set end date, allowing investors to lock in this yield unless the bank redeems the shares at par on or after August 1, 2029.

Risks and Considerations

No investment is without risk. The Series B shares' fixed rate creates duration risk—their price will drop if rates climb further. However, the 2029 call date acts as a floor: if rates remain high, the bank is unlikely to redeem the shares, locking investors into the 8% rate. Conversely, if rates fall, the shares could appreciate, though this scenario is less likely in the near term.

The non-cumulative feature is a double-edged sword. While it avoids the administrative burden of tracking missed dividends, it also means investors must monitor Bank of Hawaii's financial health. A severe economic downturn or regulatory pressure could force the bank to suspend dividends, though this is unlikely given its conservative lending practices and geographic focus on Hawaii's stable economy.

Investment Strategy: A Long-Term Anchor

For income investors with a time horizon of at least three to five years, BOH.PRB offers a compelling mix of yield and safety. Here's how to approach it:

1. Hold to the Call Date: By holding until 2029, investors can avoid price volatility tied to near-term rate hikes and secure the 8% coupon.
2. Diversify with Callable Maturities: Pair BOH.PRB with other preferreds with staggered call dates to mitigate duration risk.
3. Monitor Call Probability: Track Bank of Hawaii's capital needs and rate expectations. If the bank hints at redemption, consider reinvesting proceeds into higher-yielding alternatives.

Conclusion: A Steady Hand in an Unsteady Market

Bank of Hawaii's Series B preferred shares are not a get-rich-quick instrument, but they are a sturdy foundation for income portfolios. Their fixed dividend, premium yield, and the bank's regional stability make them a rare find in today's market. While not immune to rate risks, their call feature and long-term income potential position them as a prudent choice for investors who prioritize steady returns over speculative gains.

In a world where certainty is scarce, BOH.PRB offers a rare combination of yield and predictability—making it a valuable tool for navigating the rising rate environment.

Disclaimer: This analysis is for informational purposes only and should not be construed as personalized investment advice. Always consult a financial advisor before making investment decisions.