Alphabet's mandatory convertible preferred stock, which it issued as part of its $85 billion equity capital raising plan in June, has gotten hit along with the company's common stock and now yields more than 7.5%.
The problem for investors is that the convertible preferred securities will pay that rate only until May 2029, at which point the preferred will be converted into common shares at what could be a discount to their face value of $50 a share and their current price of around $41.
Alphabet's voting common stock (GOOGL) was off another 1.7% to $278.95 Friday after dropping 12% Thursday in the wake of its disappointing third quarter earnings report.
The company has two issues of mandatory convertible preferred outstanding.
The securities exchangeable for Alphabet's voting shares (GOOGL) are traded under ticker GOOGM and fetch $41.19, down 1.3% in the session, and the convertibles exchangeable into the nonvoting stock $(GOOGN)$ are at $41.25, also down 1.3%. The nonvoting common is traded as GOOG.
In June, Alphabet issued a total of $16.6 billion of the 6.25% mandatory convertible preferred shares divided equally into the two parts. There were 167.5 million shares in each offering priced at $50 a share. At the time, Alphabet's common stock was trading around $355 a share.
Mandatory convertible preferred shares, as the name implied, will automatically get exchanged for common stock. In the case of the Alphabet deals, that's due to occur in May 2029.
The structure is such that investors don't get the downside protection common in traditional convertible bonds and preferred. With a traditional convertible bond, the holder gets paid back the original offering price at maturity and participates in any gains in the issuer's underlying common stock.
Issuers like mandatory convertibles -- or "mandies" -- because of this feature. They'd rather not provide downside protection. And the securities have been very popular this year with Meta Platforms recently selling a large, $12.5 billion deal. But the structure works against investors in a down market. Mandatory convertibles amount to high-yield versions of the issuer's common stock rather than a traditional convertible.
With the Alphabet offerings, investors in the convertible are due to get roughly 0.14 common shares for each convertible preferred share based on current prices. That value is now about $39 per convertible preferred share, Barron's calculates.
So the holder of the preferred shares will get a nice yield of 7.6% until May 2029, but that income will be offset by a decline in the value of the preferred shares assuming no change in Alphabet common. The preferred does offer a much higher yield than the common now yielding just 0.3%.
Since the offering was made, the convertible preferred has outperformed the common stock, falling about 18% against a 21% drop in the stock. So investors have been better off in the convertible preferred.
That's some comfort in a tough period for Alphabet stock.
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