Disclaimer: The analyst who wrote this piece owns shares of Strategy (MSTR).
In a recent strategic maneuver, Strategy (MSTR) has chosen not to activate its at-the-market (ATM) equity program on common shares for funding bitcoin purchases. Instead, the company directed its efforts towards utilizing the ATM programs associated with its two perpetual preferred stocks over the past two weeks.
This decision likely stems from the decreasing premium between the company's share price and its multiple net asset value (mNAV). In simple terms, this refers to the correlation between the market capitalization of the company and the actual value of its bitcoin assets. By opting for preferred stock offerings, Strategy can raise the necessary capital for bitcoin acquisitions without diluting the stakes of its common shareholders.
Issuing common shares via ATM becomes less appealing when the share price closely aligns with the underlying value of bitcoin assets. Such offerings are most beneficial when conducted at a significant premium, thus allowing for more advantageous fundraising.
In its latest move, Strategy funded a substantial purchase of 1,045 BTC utilizing proceeds from its perpetual preferred stock ATMs: 59.18% from the STRK offering and 40.82% from the STRF offering. These preferred stocks have demonstrated impressive long-term returns, with STRK yielding 35% and STRF yielding 24%. This approach provides the company with the flexibility to continue acquiring bitcoin while safeguarding the interests of common stock investors.
There’s an additional factor influencing this situation, as highlighted by market analyst Jeff Walton. The effective dividend yields of STRK and STRF have gradually decreased from around 10%, while the yield on the benchmark U.S. 10-year Treasury has remained stable at about 4.5%. This decline is attributed to the relationship between stock prices and dividend yields; as stock prices rise, the dividend yield sees a reduction, thereby making preferred shares more attractive in a stable interest rate environment.
Looking ahead, Strategy may consider re-engaging its ATM for common stock if the share price witnesses a significant increase, particularly if it surpasses twice the mNAV. This would create an opportunity for issuing shares at a premium, making it financially advantageous. Although common stock ATM remains the principal method for fulfilling dividend obligations related to preferred shares, Strategy retains the option to utilize preferred stock ATMs as market dynamics evolve.
