Note: The analyst who authored this article holds shares of Strategy (MSTR).
Strike (STRK), the preferred stock issued by bitcoin investor Strategy (MSTR), has been trading for just over a month and is presently 3% higher than its introduction on February 5. Conversely, Strategy’s common shares have seen a decline of 20% during the same period.
Preferred stock, such as STRK, can be considered a blend of equity and debt. Holders are given priority for dividend payments over common stockholders when dividends are issued and have claim to the company’s assets in the event of liquidation. STRK is a perpetual offering, which means it has no maturity date (similar to equity) and provides a fixed dividend (like debt).
These attributes typically result in preferred stock being less volatile than common stock. This appears to hold true for STRK. According to Strategy’s dashboard, STRK has a 26% correlation with MSTR and a slightly negative correlation of -7% with bitcoin (BTC). It also exhibits lower volatility at 49%, compared to bitcoin’s approximately 60% and MSTR’s volatility exceeding 100%.
Recently, Strategy unveiled a $21 billion at-the-market (ATM) offering for STRK. This means the company is ready to sell up to that amount of the stock at the current market price over an extended period. If all the STRK shares are sold, the annual dividend obligation would total around $1.68 billion.
To generate that level of cash, the company may need to issue common stock via an ATM offering — which seems unlikely due to the current low share price — or utilize cash from operations or proceeds from any convertible debt raised.
STRK provides an 8% annual dividend yield based on its $100 liquidation preference, and at the current price of $87.45, the effective yield is about 9%. As with debt instruments, an increase in the price of STRK leads to a lower yield and vice versa.
Additionally, STRK offers a conversion feature allowing each share to be exchanged for 0.1 shares of common stock, based on a 10-to-1 ratio, when the MSTR price reaches or surpasses $1,000. With Strategy stock closing at $262.55 on Wednesday, a significant price increase would be necessary for this option to become appealing, providing potential for gains beyond STRK’s fixed dividend.
Offering a stable income-generating opportunity with reduced volatility, STRK presents a more secure option with potential for appreciation. Nevertheless, the substantial ATM offering may influence this potential upside, similar to the effects ATM share sales have had on the performance of common stock.