Strategy Shifts Capital Raising to Preferred Stocks for Bitcoin Purchases

Strategy, a prominent player in the bitcoin investment space, has recently altered its capital-raising strategy. Over the past two weeks, the company has opted to use its at-the-market (ATM) equity program on its two perpetual preferred stocks, STRK and STRF, instead of issuing common shares. This shift is likely due to the narrowing premium between the company's share price and its multiple net asset value (mNAV), which is the difference between its market cap and the value of its bitcoin holdings.

By utilizing the preferred stock ATMs, Strategy has been able to raise funds to purchase more bitcoin without diluting the stakes of its common shareholders. The most recent purchase of 1,045 BTC was funded through these preferred stock ATMs, with 59.18% coming from STRK and 40.82% from STRF. These preferred stocks have shown strong lifetime returns, with STRK at 35% and STRF at 24%. This approach allows Strategy to continue accumulating bitcoin while preserving the upside for common stock investors.

Analyst Jeff Walton points out an additional factor at play: the effective dividend yields of STRK and STRF have declined from about 10%, even though the yield on the benchmark U.S. 10-year Treasury has remained relatively constant at 4.5%. This decline in yield is due to the increase in the price of the stock, exhibiting bond-like behavior that makes the preferred shares more attractive in a stable rate environment.

Strategy may reengage the ATM on its common stock if the share price rises significantly, particularly if it exceeds twice the mNAV. This would allow for dilutive issuance at a premium. While the common stock ATM is the primary mechanism to fund dividend obligations on the preferred shares, Strategy retains the option to use the preferred stock ATMs for this purpose as well, depending on market conditions.

This shift in capital-raising strategy is part of a broader trend where companies are moving away from issuing common stocks to preferred stocks. This change is driven by several factors, including the regulatory environment, investor preferences, and the desire to maintain control over the company. Preferred stocks offer a fixed dividend, providing stable income for investors without diluting the voting power of existing shareholders. This makes them an attractive option for companies looking to raise capital without giving up control.

The current market conditions also play a role in this shift. With interest rates remaining low, investors are seeking alternative sources of income, and preferred stocks offer a higher yield compared to traditional bonds. Additionally, recent changes in tax laws have made preferred stock issuance more attractive for companies. However, preferred stocks typically have a higher cost of capital compared to common stocks, which can impact the company's financial performance. They can also affect the company's credit rating, making it more difficult to access other forms of financing in the future.

Despite these challenges, many companies are finding that the benefits of preferred stock issuance outweigh the costs. Institutional investors, such as pension funds and insurance companies, are increasingly looking for stable income streams, and preferred stocks provide a reliable source of income. The rise of passive investing has also led to an increase in demand for preferred stocks, as these investments are often included in index funds and exchange-traded funds.

Companies are also driven by the desire to maintain control over their operations. Issuing common stocks can dilute the voting power of existing shareholders, which can be a concern for companies looking to maintain control. Preferred stocks, on the other hand, do not come with voting rights, allowing companies to raise capital without giving up control. In conclusion, the shift towards preferred stocks as a capital-raising strategy is driven by a combination of factors, including investor demand, regulatory changes, and the desire to maintain control over the company. While there are challenges associated with preferred stock issuance, many companies are finding that the benefits outweigh the costs, and are increasingly turning to this financing option. As the market continues to evolve, it is likely that more companies will adopt this strategy in the future.