Disclaimer: The analyst who wrote this piece owns shares of Strategy (MSTR).
Strike (STRK), the preferred stock issued by bitcoin buyer Strategy (MSTR), has been on the market for just over a month and is currently 3% higher than at its February 5th introduction. In contrast, Strategy’s common stock has depreciated by 20% over the same period.
Preferred stock like STRK serves as a hybrid between equity and debt, granting holders greater rights to dividend payments than common stock owners if the company generates profits, as well as claims to the company’s assets in a liquidation scenario. STRK is notable for being a perpetual issue, meaning it lacks a maturity date (similar to equity) while paying a fixed dividend (akin to debt).
These characteristics lead preferred stock to experience less volatility compared to common stock, a trend that STRK appears to follow. According to Strategy’s dashboard, STRK exhibits a 26% correlation with MSTR and has a slightly negative -7% correlation with bitcoin (BTC). Furthermore, STRK has a volatility rating of 49%, which is notably lower than bitcoin’s approximately 60% and MSTR’s volatility exceeding 100%.
Recently, Strategy announced a $21 billion at-the-market (ATM) offering for STRK. This means the company is prepared to sell up to that amount of the stock at the current market price over a designated period. Should all STRK shares be sold, the total annual dividend obligation for the company would amount to around $1.68 billion.
To generate such a substantial amount of cash, Strategy would need to pursue selling common stock through an ATM offering, though this seems unlikely given the current depressed share price. Alternatively, the company could utilize cash generated from operations or proceeds from any convertible debt arrangements.
STRK currently offers an annual dividend yield of 8% based on its $100 liquidation preference, and at the current price of $87.45, provides an effective yield of approximately 9%. As with any debt instrument, the relationship between STRK’s price and its yield is inversely proportional: a higher share price results in a lower yield and vice versa.
Moreover, STRK features a conversion option allowing each share to be converted into 0.1 share of common stock, at a 10-to-1 ratio, when the MSTR price reaches or exceeds $1,000. Last Wednesday, Strategy stock closed at $262.55, suggesting that substantial appreciation would be required for this option to become viable, thus presenting potential upside beyond STRK’s fixed dividend.
As an income-generating instrument with lower volatility, STRK presents a more stable investment opportunity with promising upside potential. However, the extensive ATM offering may influence this potential upside negatively, reminiscent of how such offerings have affected the common stock’s performance.
