Disclaimer

The analyst who wrote this piece owns shares of Strategy (MSTR).

Overview

Strategy (MSTR), a U.S. company focused on acquiring Bitcoin (BTC) as a core policy, recently enhanced its financial toolkit by introducing a second Series A perpetual preferred stock.

New Offering

The company is selling 8.5 million shares of the new offering, termed Strife (STRF), priced at $85 each, raising a total of $711.2 million for Bitcoin acquisitions—an increase from the initial aim of $500 million. This offering will close later on Tuesday. Previously, Strategy’s first preferred stock issuance, Strike (STRK), raised $563 million.

Features of Perpetual Preferred Stock

Perpetual preferred stocks occupy a position between debt and common equity in the capital hierarchy, generally providing dividends and enhanced price stability. This makes them attractive to investors looking for lower volatility and steady returns. It’s important to note that holders of preferred stock do not have voting rights.

STRF offers a 10% annual dividend on a $100 stated value, with quarterly cash payments. If Strategy fails to pay a dividend, the missed amount will accumulate at an additional 1% per year, maxing out at an 18% dividend rate, incentivizing timely payments.

Strategy has the option to redeem all STRF shares if less than 25% of the original issuance remains or upon certain tax occurrences. In these situations, shareholders would be entitled to receive their liquidation preference along with any unpaid dividends. Should a “fundamental change” occur, holders can compel the company to buy back their shares at the stated amount plus accrued dividends.

Comparison with STRK

Contrary to STRF, STRK offers an 8% annual dividend based on a $100 liquidation value, although the effective yield diminishes as the price increases. STRK also includes a conversion feature that enables holders to switch their preferred shares into common stock at a 10:1 ratio if the common share price reaches $1,000, providing potential equity upside. Thus, the STRF issuance behaves more like a fixed-income security and is less volatile.

While STRK may attract investors looking for a combination of yield and potential capital appreciation, STRF is tailored for those who prioritize income and capital stability. To uphold these dividend commitments, Strategy will leverage operational cash flow, proceeds from convertible debt offerings, and at-the-market (ATM) share sales associated with the common stock.

Additional to this, the company has an operational ATM program for STRK and has recently purchased 130 BTC. It retains about $3.57 billion in ATM capacity through common stock, offering substantial flexibility in funding dividend obligations while continuing its Bitcoin acquisition strategy.

The company’s shares surged over 10% on Monday, and at that time it held 506,137 BTC.