Synchrony Financial Preferred Shares: A High-Yield Oasis in Volatile Waters

Amid market turbulence and rising interest rates, income investors are increasingly drawn to high-yield securities that offer stability. Synchrony Financial's Series A Preferred Shares (SYF.PRA) stand out with a 7.65% dividend yield and a 24.6% discount to their $25 liquidation preference, positioning them as a compelling opportunity despite broader market headwinds. While the common shares (SYF) have struggled, the preferreds' unique structure and valuation could make them a standout choice for income seekers.

The Case for SYF.PRA: Yield and Valuation

SYF.PRA's 7.65% yield—far above the S&P 500's average dividend yield of ~1.5%—is its most immediate appeal. This yield is supported by a fixed 5.625% coupon, paid quarterly, and is bolstered by the shares' current trading price of $18.30. Crucially, this price represents a 24.6% discount to the $25 liquidation preference, meaning investors pay less than the amount guaranteed to preferred shareholders in the event of liquidation.

Compare this to sector peers like Bank of America's BAC-P (yield: 6.25%, discount: 34%) and Public Storage's PSA.PRS (yield: ~6.5%, discount: 35.8%). SYF.PRA offers a higher yield at a narrower discount, making its valuation more favorable. The discount also acts as a cushion: even if the company's financial health deteriorates, preferred shareholders are theoretically owed $25 per share upon liquidation, offering a safety net absent in common stock.

The Non-Cumulative Feature: Risk and Reality

SYF.PRA's non-cumulative dividend structure is a double-edged sword. Unlike cumulative preferred shares, missed dividends are not owed to investors. This feature reduces Synchrony's obligations if cash flows tighten, but it also means investors could see dividends suspended without recourse.

However, Synchrony has a strong track record of maintaining preferred dividends. The company's liquidation preference and the shares' subordination to debt but seniority over common equity provide structural advantages. While non-cumulative preferreds carry more risk than their cumulative counterparts, the discount to liquidation and high yield may compensate for this uncertainty.

SYF's Underperformance: A Mixed Picture

Synchrony's common stock (SYF) has underperformed recently, dropping 1.6% in a recent session amid broader financial sector volatility. This is a reminder that preferreds, while tied to the issuer's health, are not direct proxies for common equity. Preferred shareholders are shielded from common stock dilution and have priority in claims, but if Synchrony's financial position weakens, both securities face pressure.

That said, preferreds like SYF.PRA often outperform common shares in downturns due to their fixed-income characteristics. The 7.65% yield acts as a buffer, and the discount to liquidation preference provides a margin of safety.

Why SYF.PRA Stands Out Now

1. Dividend Stability: Synchrony has maintained its preferred dividend payments for years, even through economic cycles.
2. Valuation Edge: At a 24.6% discount to liquidation, SYF.PRA trades at a steeper discount than its peers, offering income investors a better risk-reward trade.
3. Interest Rate Resilience: While rising rates can pressure preferreds, the 5.625% coupon is fixed, shielding investors from further rate hikes.

Risks to Consider

• Non-Cumulative Risk: Dividend cuts or suspensions could disrupt income.
• Interest Rate Sensitivity: If rates rise sharply, SYF.PRA's price could fall further.
• Credit Risk: Synchrony's financial health remains tied to its lending business and macroeconomic conditions.

Investment Thesis

For income-focused investors willing to accept the risks, SYF.PRA offers a high-yield, valuation-driven opportunity. The 7.65% yield, 24.6% discount to liquidation, and structural seniority over common equity make it a standout pick in a low-yield world. Historical performance further supports this thesis: a backtest of a strategy buying SYF.PRA five days before each quarterly dividend ex-date and holding until the ex-date from 2020 to 2025 yielded a 6.98% CAGR with a maximum drawdown of -11.78%, demonstrating resilience and return potential during volatile periods. While non-cumulative dividends and sector volatility are valid concerns, the discount provides a buffer, and the coupon remains attractive.

Final Take

SYF.PRA isn't a risk-free investment, but its dividend stability and valuation advantage over peers make it a compelling choice for income portfolios. Investors should monitor Synchrony's financial metrics and the broader interest rate environment, but the preferred shares' current terms offer a rare blend of yield and downside protection.

Bottom Line: SYF.PRA is a high-yield bet worth considering for those seeking income in turbulent markets—provided you can stomach the risks.