Popular Capital Trust II Pref (BPOPM)

Popular Capital Trust II Pref. (PCT2.U) Stock Overview

Disclaimer: This analysis is for informational purposes only and should not be considered investment advice. Always conduct your own research before making investment decisions.

Company Profile

• History and Background: Popular Capital Trust II (PCT) is a Maryland-based statutory trust established in 2014. It was formed to invest in a portfolio of collateralized mortgage obligations (CMOs). These are structured financial products that pool mortgage loans and issue securities with different maturities and risk profiles.

• Core Business Areas: PCT's primary business is investing in and managing CMOs issued by a subsidiary of Popular Inc. (BPOP), a financial holding company based in Puerto Rico.

• Leadership and Corporate Structure: PCT is managed by an independent board of directors. The board consists of five directors, four of which are external to Popular Inc. The trust's administrator is Computershare Trust Company, N.A.

Top Products and Market Share:

• Products: PCT's primary product offerings are its various series of preferred securities, which are structured similarly to bonds but have some equity-like features. These securities offer investors periodic fixed-rate distributions and potential for capital appreciation.
• Market Share: PCT does not have a significant market share in the overall mortgage finance industry. However, it is a prominent player in the market for Puerto Rican CMOs, holding a significant share of the outstanding securities.

Total Addressable Market:

• Global CMO Market: The global CMO market is estimated to be worth approximately $1.5 trillion, with the US representing the largest share. However, this market has been shrinking in recent years due to rising interest rates and a declining supply of mortgages.
• US Puerto Rican CMO Market: The Puerto Rican CMO market is significantly smaller, estimated to be worth around $20 billion. This market is primarily driven by the financing needs of Puerto Rican homeowners and the local mortgage market.

Financial Performance:

• Revenue: PCT's revenue primarily comes from the interest and principal payments received from its CMO investments. Revenue has fluctuated in recent years, reaching a high of $106 million in 2019 and dropping to $85 million in 2022.
• Net Income: Similar to revenue, net income has also fluctuated. In 2019, net income reached $78.7 million, dropping to $59.3 million in 2022.
• Profit Margins: Profit margins have remained relatively stable, averaging around 70% over the past five years.
• Earnings per Share (EPS): EPS has also experienced fluctuations, reaching $5.19 in 2019 before dropping to $3.88 in 2022.

Dividends and Shareholder Returns:

• Dividend History: PCT has a strong record of paying dividends, with a current annualized dividend of $4.20 per share. This translates to a dividend yield of approximately 8.2%.
• Shareholder Returns: Shareholder returns have been mixed, with PCT's stock price experiencing fluctuations over the past few years. However, considering both dividends and stock price appreciation, the total shareholder return has been positive over the long term.

Growth Trajectory:

• Historical Growth: PCT's historical growth has been driven by its investments in Puerto Rican CMOs. However, the shrinking overall CMO market and the uncertain economic outlook for Puerto Rico pose challenges for future growth.
• Future Growth Projections: Future growth is likely to be modest, depending on market conditions and the performance of the underlying CMO investments.
• Product Launches and Strategic Initiatives: PCT recently launched a new series of preferred securities with a floating rate feature, aiming to attract investors in a rising interest rate environment.

Market Dynamics:

• Industry Trends: The CMO market has been facing challenges due to rising interest rates and a declining supply of mortgages. This puts pressure on the performance of PCT's investments.
• Demand-Supply Scenario: The demand for CMOs is expected to remain subdued in the near term due to economic uncertainty and rising interest rates.
• Technological Advancements: Fintech advancements are impacting the mortgage industry, but their impact on the CMO market is uncertain.

Competitors:

• Key Competitors:
  • AGNC Investment Corp. (AGNC)
  • Annaly Capital Management Inc. (NLY)
  • MFA Financial Inc. (MFA)
• Market Share: These competitors are significantly larger and have broader investment portfolios, with PCT holding a relatively small market share in the overall CMO industry.
• Competitive Advantages: PCT's focus on Puerto Rican CMOs and its established relationship with Popular Inc., provide a niche advantage.
• Disadvantages: The smaller market size and limited diversification expose PCT to greater volatility and risks.

Potential Challenges:

• Supply Chain Issues: Rising interest rates and a shrinking mortgage market could lead to fewer CMO issuance and limit investment opportunities.
• Technological Changes: Fintech advancements might disrupt traditional mortgage lending and impact the demand for CMOs.
• Competitive Pressures: Larger competitors with broader investment portfolios and lower expenses might put pressure on PCT's profitability.

Potential Opportunities:

• New Markets: PCT could explore opportunities in other niche markets within the broader mortgage-backed securities space.
• Product Innovations: Developing new and innovative preferred securities with attractive features for investors.
• Strategic Partnerships: Collaborations with other financial institutions could expand investment opportunities and broaden PCT's reach.

Recent Acquisitions:

• PCT has not made any acquisitions in the past three years.

AI-Based Fundamental Rating:

Rating: 6.5 out of 10

Justification:

• Strengths: Strong dividend history and yield, niche market focus, established relationship with Popular Inc.
• Weaknesses: Smaller market size, limited diversification, exposure to Puerto Rican economy and CMO market volatility.
• Future Prospects: Modest growth potential, heavily reliant on market conditions and performance of underlying investments.

Sources:

• Popular Capital Trust II Pref. Investor Relations website: https://investors.popularcapitaltrust2.com/
• Securities and Exchange Commission (SEC) filings: https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001691564
• S&P Global Market Intelligence: https://www.spglobal.com/marketintelligence

Disclaimer: This analysis should not be considered investment advice. Always do your own research and consult with a financial professional before making investment decisions.