Google Now Yields 6.25% - Here Is What You Are Actually Buying

Introduction

Preferred stock is one of the most misunderstood corners of the market, and I say that as someone who writes about it a lot. Most people treat these products as bonds with a fixed coupon.

I have to admit that this works most of the time. However, it stops working completely when you run into the (more complex!) security I want to talk about today. I'll actually bring up more than one interesting security. 

Because there are now two instruments trading on the Nasdaq with Google's name on them, paying 6.25%, and almost every write-up I have seen calls them "preferred stock" and leaves it there. Technically, it's correct. However, practically, it's completely useless. 

They are mandatory convertible preferreds. A mandatory convertible is a common stock with a coupon and a ceiling, wearing a preferred stock costume (so to speak), with a hard date on which the costume comes off. It sounds silly, but in a bit, I'll tell you exactly what I mean by this. 

There's just one problem with explaining this in the abstract: it sounds like a technicality until you see what it does to real money.

Hence, I am going to use two live examples. Alphabet's (GOOGL) new (GOOGM) and (GOOGN), which are the cleanest version of the structure you will find. And QXO's (QXO) (QXO.PR.B), which has already put its holders through the entire lesson in about four months.

I'll walk through what Alphabet actually did in June, how these securities work mechanically, the scenario math on both, the rule I use to judge them, and what the sudden popularity of this structure says about where we are in the cycle.

So, let's dive in!