Strategy Took a Big Step Toward Solving Its Bitcoin-Preferred Problem. Here’s How.

Shares of Strategy are down 45% this year, and Bitcoin prices have dropped. (ANGELA WEISS/AFP/Getty Images)

Key Points

• Strategy established a $1.44 billion reserve from common stock sales to cover over $700 million in annual preferred dividend payments.
• The company’s preferred stock yields range from 9% to nearly 13%, significantly higher than major bank preferred stock rates.
• Strategy sold nearly $1.5 billion in stock between Nov. 17 and Nov. 30 to fund the preferred dividend reserve.

Strategy moved to ease concerns about its ability to pay more than $700 million of annual preferred dividend payments by establishing a $1.44 billion reserve funded by the sale of common stock to cover the dividends.

The action, announced Monday, could bolster prices of the company’s $8 billion of preferred stock that have come under pressure in the past month, given the decline in the price of Bitcoin and Strategy’s common stock.

By setting up the reserve, it relieves any pressure on the company to sell Bitcoin to fund the preferred dividends. The action could be a bullish development for both Bitcoin and Strategy’s preferred.

The Strategy preferred now yields from 9% to nearly 13%, considerably above the 6% rate on preferred stock from major banks like Bank of America and JPMorgan Chase.

“Strategy’s current intention is to maintain a USD Reserve in an amount sufficient to fund at least twelve months of its Dividends, and Strategy intends to strengthen the USD Reserve over time, with the goal of ultimately covering 24 months or more of its Dividends,” the company said.

The company sold nearly $1.5 billion of new common stock from Nov. 17 to Nov. 30 in the open market to create the preferred dividend reserve. The company has four dollar-based preferred stock issues outstanding, known by their Nasdaq ticker symbols STRC , STRD, STRF , and STRK . It has issued all those securities this year.

Despite what appears to be a bullish development in pre-funding preferred dividend payments, Strategy preferred prices are lower on Monday, perhaps related to the Bitcoin selloff. The STRF preferred is off 2.2% to $106.32, and the STRD preferred is down 1% to $76.89. The largest issue, STRC, is little changed at $96.46.

There has been concern among investors about the company’s ability to fund the preferred stock dividends since Strategy’s software business operates at break-even, and its large Bitcoin holdings—now worth about $55 billion—yield nothing. The drop in Bitcoin prices has increased investor jitters as the company’s common stock has fallen. Strategy holds 650,000 Bitcoin, or more than 3% of the total outstanding.

Its common stock is off 7% in Monday trading to $164.75 and is down more than 60% from its 52-week high set a year ago. Bitcoin is down almost 5% Monday to around $86,000.

Created with Highcharts 9.0.1Sources: CoinDesk; FactSetAs of Dec. 1, 5:30 p.m. ET

Created with Highcharts 9.0.1StrategyBitcoin priceNov. 18Dec.-25-20-15-10-5051015%

The company’s strategy has been to issue common stock, preferred stock, and convertible debt to fund purchases of Bitcoin. Until now, it hasn’t built a preferred stock dividend reserve. It has run with little cash on its balance sheet, with cash totaling around $50 million on Sept. 30.

Barron’s wrote favorably on the Strategy preferred recently, arguing the yields—then higher than they are now—were attractive considering the ample amount of Bitcoin held by the company that could be sold to fund preferred dividend payments if needed. With the sale of common stock and establishment of the preferred dividend reserve, Strategy appears not to need to sell Bitcoin to fund its preferred stock dividends.

In a client note before the Strategy preferred dividend news, Benchmark analyst Mark Palmer wrote that Strategy detractors treat its annual preferred and convertible debt dividend and interest payments as an “existential threat.” Palmer wrote that he sees the issue as “quite manageable,” and the company moved to address it on Monday.

There has also been insider buying of Strategy preferred, particularly the large STRC issue that now yields more than 10%. It carries a floating rate and is designed to trade close to its $100 face value.

Write to Andrew Bary at andrew.bary@barrons.com