Why Strategy's Preferred Stock, STRK, is Outperforming MSTR Despite Downturn

STRK Rises 3% Since February Launch, While MSTR Falls Over 20%

Key Points to know:

• Strategy's preferred stock, STRK, provides a 9% dividend yield and is less volatile than MSTR or bitcoin.
• STRK features a 10-to-1 conversion option if MSTR stock reaches $1,000.
• The $21 billion ATM issuance could impact STRK’s upside potential, similar to its effect on MSTR’s common stock.

Strike (STRK), the preferred stock issued by bitcoin buyer Strategy (MSTR), has risen 3% since its February 5 launch, while Strategy's common stock has dropped by 20% over the same period.

Preferred stock, like STRK, is a blend of equity and debt. Holders have priority over common stock owners for dividend payments if the company distributes them, as well as in the event of a liquidation. STRK is a perpetual issue, meaning it has no maturity date (like equity) and pays a fixed dividend (like debt).

These features make preferred stock generally less volatile than common stock, and STRK appears to follow that trend. According to Strategy's dashboard, STRK has a 26% correlation with MSTR and a slightly negative -7% correlation with bitcoin (BTC). Additionally, its volatility stands at 49%, which is lower than bitcoin's roughly 60% and MSTR's volatility, which exceeds 100%.

Last week, Strategy unveiled a $21 billion at-the-market (ATM) offering for STRK, meaning the company plans to sell up to that amount of stock at the current market price over time. If all STRK is sold, the company would face an annual dividend bill of around $1.68 billion.

To generate this amount of cash, the company would either need to sell common stock through an ATM offering—unlikely due to the recent decline in share price—or rely on cash from operations or proceeds from any convertible debt raised.

STRK offers an 8% annual dividend yield based on its $100 liquidation preference. At the current price of $87.45, the effective yield rises to about 9%. As with debt, the higher the STRK price, the lower the yield, and vice versa.

Additionally, STRK includes a feature allowing each share to be converted into 0.1 share of common stock, at a 10-to-1 ratio, if the MSTR price reaches or exceeds $1,000. Currently, Strategy stock closed at $262.55, so for this option to become viable, the stock would need to appreciate significantly, offering potential upside beyond STRK’s fixed dividend.

As an income-generating product with lower volatility, STRK provides a more stable option with potential upside. However, the massive ATM offering could impact this potential, similar to the way ATM share sales have affected the common stock’s performance.