Goldman Sachs issues preferred shares to exploit the lowest credit spreads in over a decade, offering high-yield bank paper while potentially weighing on common stock.
Goldman Sachs' decision to issue preferred stock days after credit spreads hit post-crisis lows can be viewed as bearish for common equity. The new preferred dividends increase fixed charges, potentially compressing net income available to common shareholders. While the low spread environment reduces the cost of this capital, the immediate dilution effect often weighs on the stock.
In the short term, the additional fixed dividend obligations can dilute earnings per share and weigh on the stock. However, if the capital is deployed effectively, long-term benefits could outweigh the initial drag.
The spread low indicates that the premium investors demand to hold investment-grade bonds over Treasuries is extremely narrow, translating to very cheap funding for high-quality issuers like Goldman. It allows the bank to raise capital at historically low rates.
Goldman Sachs Group Inc. is offering preferred stock days after investment-grade credit spreads touched the narrowest since the 2008 financial crisis. The issuance leverages rock-bottom funding costs to shore up capital but introduces fixed dividend obligations that could dilute common shareholders. The deal tests investor appetite for bank paper amid strong demand for yield.
Goldman is capitalizing on near-record low credit spreads, which reduce the cost of raising capital through preferred shares. The spread low reflects strong investor demand for yield, allowing the bank to lock in attractive financing terms for subordinated capital.
Preferred stocks are hybrid securities that pay fixed dividends and have priority over common stock in dividend payments and bankruptcy, but typically lack voting rights. They offer higher yields than bonds and trade on exchanges like equities.
The issuance creates additional fixed dividend obligations that must be met before common dividends, potentially reducing earnings per share. However, it avoids voting dilution and can fund initiatives that enhance long-term shareholder value.