Strive’s SATS: How 15% Yield Becomes A Bitcoin Accretion Machine

Bitcoin Magazine Strive’s SATS: How 15% Yield Becomes A Bitcoin Accretion Machine On the accretive potential of the SATS preferred stock. This post Strive’s SATS: How 15% Yield Becomes A Bitcoin Acc...

Strive’s newly IPO’d SATS perpetual preferred stock introduces an interesting opportunity: the company could potentially issue preferred equity above its $100 stated amount and grow Net Bitcoin Per Share (Net BPS) in each issuance round, subject to risks and parameters described below.

This article discusses how and why it works. The key question is whether SATS will trade above $100. Its unusually high 15% fixed dividend makes that outcome, and the subsequent accretion, plausible.

SATS carries a fixed annual dividend of $15 per share, based on its $100 stated amount and its 15% number. It ranks junior to Strive’s SATA preferred stock, but its dividend structure offers investors two attractive features.

First, SATS dividends are cumulative. Strive can defer payments, but any unpaid dividends accumulate as an obligation to preferred shareholders.

Second, the $15 annual dividend is fixed. This differs from SATA, which currently pays an annualized $13 per share but uses a variable dividend rate. Therefore, SATA shareholders could receive less income in the future if Strive reduces that rate. SATS dividends accrue at a fixed $15 per share per year, but are payable only “when, as and if” declared by Strive’s board, and may be deferred.

These features could make SATS particularly attractive to investors seeking predictable long-term income.

Consider Strategy’s STRD, the company’s juniormost preferred. STRD currently trades around $71 per share, 29% below its $100 stated amount. Its fixed $10 annual dividend translates into an effective yield of 14%. STRD dividends are also non-cumulative, meaning Strategy can skip payments without creating an obligation to repay those amounts later.

Admittedly, Strategy has significantly stronger Bitcoin asset coverage supporting STRD than Strive has supporting SATS. In fact, STRD’s 4.7x BTC Rating has twice as much asset coverage as SATA, Strives most senior instrument.

That said, many income investors may place greater weight on dividend reliability than on coverage ratios. SATS offers cumulative dividends and a substantially higher stated yield, creating a reasonable case for the market to price its effective yield below that of STRD.

For example, if investors bid SATS to a 13% effective yield, its market price would reach $115.38.

Suppose SATS trades at $115 and Strive issues another 1 million shares through an at-the-market offering.

However, under a Net BPS methodology that deducts preferred stock at its $100 notional amount, those new shares create only $100 million in additional preferred claims.

The remaining $15 million flows directly into the calculation of net Bitcoin attributable to common shareholders.

Under these parameters, Strive effectively raises $115 of capital for every $100 of preferred notional it creates. The annual dividend remains $15, producing an effective financing cost of 13.04% on the capital raised.

There is one caveat to mention: SATS has a floating liquidation preference that adjusts based on recent market prices. If SATS trades at $115, its liquidation preference can rise toward $115, temporarily increasing the economic claim held by preferred shareholders. However, liquidation preference can also reset downward. The formula references the previous trading day’s closing price during periods surrounding new issuance and the average closing price over the preceding 10 trading days, subject to a $100 floor. If SATS subsequently trades at $100 for 10 trading days, its liquidation preference returns to $100.

While SATS trades above par, the higher liquidation preference offsets some or all of the apparent economic accretion. Once the preference returns to $100, the company retains the additional capital raised above par while the preferred liquidation claim falls back to its stated amount.

But here’s the thing. The exact liquidation preference number only becomes relevant if the company is going to liquidate. And this would only happen if the company goes bankrupt. But if the company goes bankrupt, the preferred stock will almost certainly go below $100, which would make the liquidation preference return to $100. In other words, the caveat of the floating liquidation preference actually does not matter when you look at everything in context—it is perfectly valid to use $100 per share as the de facto notional value to compute Net BPS. (Note also that Net BPS is defined by Strategy, and not a metric explicitly reported by Strive. Strive’s prospectus also identifies tax risks that may arise if shares are issued above the liquidation preference, including deemed distributions, disqualified preferred stock treatment, and fast-pay stock treatment.)

The above-par issuance premium can therefore become genuine residual asset value for common shareholders, when we consider the Net BPS metric.

This could possibly be one of the main reasons Strive decided to go as high as 15%. The high dividend gives it a greater chance of going above par and enabling the aforementioned mathematically guaranteed Net BPS accretion.

At $115, Strive effectively raises capital at a 13% annual dividend cost. At $100, that cost rises to 15%. At $90, the effective cost climbs to 16.67%, while issuance also becomes dilutive under a Net BPS calculation.

Strive should therefore exercise considerable discipline when issuing SATS through an ATM program. Locking mid-to-high-teens costs of capital would only work out well if the return on capital from Bitcoin is massive and if volatility drag does not become a big issue.

Strive also intends to maintain an 18-month dividend reserve equivalent to $22.50 per SATS share, adding another capital allocation consideration.

Assuming the company maintains 18 months of dividend coverage, it would need to set aside $22.50 for each share it sells. Assuming it sells at par, that means 22.5% of the money raised must sit in cash equivalents while the remaining 77.5% can be deployed into Bitcoin. Therefore, we can see that the true cost of capital when accounting for the drag of being able to use only 77.5% of your financing is higher than the effective yield at which shares were issued.

SATS may become one of the most expensive digital credit instruments on a stated dividend basis, while simultaneously becoming one of the more attractive financing tools for the Net BPS metric.