By ANDREW BARY

MicroStrategy, the largest corporate holder of Bitcoin, is a polarizing company, and its two preferred stock deals this year have gotten a rocky reception from fixed-income investors. They deserve a look.

These are no ordinary preferreds. They lack one thing that most bond investors seek: earnings to pay annual dividends. Instead, the preferreds, which yield about 10%, are essentially backed by the company's large cryptocurrency holdings, now worth more than $40 billion. This has created a debate online, with critics citing the lack of current earnings at MicroStrategy as a reason for staying away.

The lofty yields, however, are enticing. They compare with about 6% on bank preferred, which dominates the $400 billion market for preferred stock. The yields also comfortably exceed the 7% yields on junk-bond exchange-traded funds like the iShares iBoxx $ High Yield Corporate Bond (ticker: HYG). Investors have to look to lower-rated junk debt to find comparable yields.

The MicroStrategy preferreds -- a senior form of equity that's junior to company debt -- also look like a better investment than its common shares, now trading around $330. The common stock looks richly priced, as Barron's has argued. It is valued at $86 billion, or about double the value of the company's Bitcoin holdings, making an ETF like the iShares Bitcoin Trust (IBIT), which trades with no premium, a better option.

MicroStrategy, commonly known as Strategy, sold the preferred as part of a continuing program of issuing common stock, debt, and preferred stock to buy Bitcoin. The company has sold $17 billion of common stock, $5 billion of convertible bonds, and $1.6 billion in face value of preferred since last October. MicroStrategy has used the proceeds to fuel a Bitcoin buying spree -- the company now owns about 506,000 Bitcoins, or more than 2% of the total Bitcoin market.

MicroStrategy's second preferred deal, known as Strife (ticker: STRF), began trading on the Nasdaq this past week. That deal carries a 10% dividend yield and changes hands around $94. That's up from an offering price of $85 but below its face value of $100 per share. That works out to a yield of 10.65% on the 8.5 million shares outstanding. Three MicroStrategy executives bought Strife at the $85 offering price, including CEO Phong Le, who purchased 6,000 shares. By contrast, there haven't been insider purchases of MicroStrategy common since 2022.

The initial offering, known as Strike (ticker: STRK) has a face value of $100 and an 8% annual dividend, but now changes hands at about $87, for a yield of about 9.2%. The lower yield on the older issue reflects an equity conversion option, which allows holders to swap the preferred for common shares if MicroStrategy stock rises sharply.

Each Strike share can be converted into one-tenth of common, meaning the common would have to more than double to make conversion economic, though the conversion feature has value even when it's out of the money.

Both preferred deals had to be sold more cheaply than the $100 a share MicroStrategy had anticipated, and like many preferred, the deals are perpetual, with no maturity dates. The newer deal looks more attractive because of the higher yield and low likelihood of a conversion on the Strike issue.

Michael Saylor, the company's chairman and controlling shareholders, called the Strife deal a "unique, high-performance fixed-income preferred" in an online presentation before the deal was priced on March 21. He is willing to pay such high yields because he sees Bitcoin rising at a 20%-plus annual rate, exceeding the 10% dividend on the preferred stock.

Critics don't believe that the yields cover the risks. There are no credit ratings on the two deals, but they probably would carry junk ratings like the low, single-B rating that Moody's had on the company's debt before it was withdrawn in 2024. And, Strategy lacks traditional earnings. Its small software business has some $500 million of annual revenue and no earnings under generally accepted accounting principles. Plus, Bitcoin, like gold, yields nothing, which means the company may need to sell crypto or raise money to meet obligations.

That looks risky to some observers. "Dude. You operate a money-losing, terrible software business with only $460 million in sales and are committing to a 10% cash dividend on a preferred?" wrote Chris Bloomstran, chief investment officer at Semper Augustus Investments, on X in response to a Saylor post on the Strife deal. "So, you will either need to sell the precious Bitcoin or raise new capital to pay the dividend? Ponzi the Saylor Man."

Microstrategy's Bitcoin holdings, worth $44 billion, considerably exceed its debt and preferred, which total some $10 billion. The cryptocurrency would have to drop very sharply for the stash to be worth less than the debt and preferred. Annual preferred dividends are $140 million. Higher Bitcoin prices would increase the security of the preferred.

While MicroStrategy doesn't hold much cash -- it ended 2024 with $38 million -- it could easily sell Bitcoin or equity. The company recently issued nearly $600 million of stock and used nearly all to buy Bitcoin. If it built its cash reserves, Strategy would bolster the dividend security of its preferred and probably lower its dividend costs.

Most preferred dividends get taxed like common stock dividends at a top federal rate of 20% -- plus a Medicare surcharge. Microstrategy's preferred, however, could be taxed as a return of capital since it has no traditional earnings. That would mean no current taxation, as the dividend would reduce the holder's cost in the stock -- with taxes paid when the preferred is sold.

"I'm convinced that virtually all of the distributions to be made on Strategy's preferred stock will be a return of capital, rather than a dividend," says New York tax expert Robert Willens. Any paper profits on appreciation of the company's Bitcoin holdings wouldn't count as earnings for purposes of the preferred stock dividends, but any realized gains would qualify. MicroStrategy has given no indication that it wants to sell any of its Bitcoin.

Many investors, says Willens, like the return of capital treatment since it results in a tax deferral.

The preferred isn't for everyone, but it offers a high yield, considerable asset coverage, a muted Bitcoin play, and better risk/reward than the common stock. Don't ignore it just because it's MicroStrategy.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 28, 2025 10:56 ET (14:56 GMT)

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