Summary Strategy has established a $1.44 billion cash reserve to cover preferred dividends and debt interest, reducing balance sheet concerns. MSTR executed an upfront equity sale, increasing Class A outstanding shares to over 276 million. STRC dividend rate was raised to 10.75%, reflecting persistent sub-par trading and increasing annual preferred payments to nearly $775 million. As Bitcoin prices have fallen more than 25% from their all-time highs recently, shares of Strategy Inc. ( MSTR ) have taken a hit. The world's biggest Bitcoin treasury company has seen its shares fall to new 52-week lows recently, as investors' confidence in the name has been shaken. On Monday, the company announced a major move in an effort to calm balance sheet fears, one that will cost investors a little more over time if the stock moves higher. Previous coverage of the name My most recent article on Strategy came back in early November, after which the company had reported its Q3 results and announced its latest preferred share offering . While the company's software business did well in the period, overall results are more heavily reliant on the move in Bitcoin. Looking to raise more capital to fund its crypto purchases, the company announced a Euro-denominated preferred share class. Since then, Strategy shares have lost more than a third of their value thanks to Bitcoin's decline, while the S&P 500 is near the flat line. Strategy announces cash reserve As I've been detailing for several months now, the amount of dividend payments that Strategy has been making to its preferred shareholders has been soaring . The company has launched multiple new share classes and used at-the-market sales programs to raise capital. There are currently the following preferreds: Strategy Inc 8.00% SERIES A PERPETUAL STRIKE PFD ( STRK ), which features an 8% annual yield. Strategy Inc 10.00% SER A PERPETUAL STRIFE PFD STK ( STRF ), which features a 10% annual yield. Strategy Series A Perpetual Stride Preferred Stock ( STRD ), which features a 10% annual yield. Strategy Inc 9.0% SERIES A PERPETUAL STRETCH PREF STK ( STRC ), which features a 10.75% annual yield that is variable. More on this later. Strategy’s 10.00% Series A Perpetual Stream Preferred Stock, which is the Euro-denominated one. At the moment, the company is approaching $8 billion in notional value from the five preferred share classes listed above, based on the holdings data it provides. When you thus apply the current dividend amounts to those respective offerings, the annual run-rate dividend payments are now over $770 million. That's tremendous growth as seen in the chart below. Strategy Preferred Stock Dividend Payments (Company Filings) With the company usually maintaining a low cash balance, management has typically sold MSTR shares in order to finance these dividends, as well as pay interest on its outstanding debt. On Monday, the company announced that it had created a $1.44 billion cash reserve to support dividend and interest payments. Initially, the goal is to have enough money to fund these needs for 12 months, with the ultimate goal being 24 months. To fund this reserve, Strategy announced that it had sold over 8.2 million shares of MSTR stock between November 17th and 30th. This resulted in net proceeds of nearly $1.48 billion. On one hand, this will ease investor concerns about the company's ability to pay these preferred dividends, and it means that current MSTR shareholders will not be diluted in smaller segments over time. However, it means an upfront hit in terms of dilution, and if MSTR shares were to rise over time to say $200, $300, or more, the company wouldn't have needed to sell as many shares then. After being at around 76 million Class A shares at the end of 2020 (on a split-adjusted basis), MSTR now has over 276 million Class A shares outstanding. An increased dividend rate The other major piece of news on Monday was regarding STRC shares, which is the variable dividend rate preferred offering. Strategy announced that it would be raising the dividend effective for monthly periods commencing on or after December 1, 2025, by 25 basis points to 10.75% per year. As a reminder, these are the current guidelines for STRC and its dividends: Below $95.00: Recommend a dividend rate increase of 50 basis points or more for the next period. $95.00 - $98.99: Recommend a dividend rate increase of 25 basis points or more for the next period. $99.00 - $100.99: No change in the dividend rate is anticipated. However, management may use its discretion to recommend a minor increase or decrease of 25 basis points, depending on prevailing market and capital conditions. $101.00 and above: Recommend a dividend rate decrease of 25 basis points, or a larger decrease if one-month term SOFR interest rates declined during that month (in each case, subject to the cap on rate reductions described in the Prospectus and Certificate of Designations for the STRC Stock), and/or a follow-on offering of STRC Stock. As you can see in the chart below, STRC shares have had a tough time in recent months staying close to $100, which is par value. As a result, the dividend has now been raised three times already, and given the current price, it will head even higher moving forward. Even if Strategy doesn't sell any more shares of this preferred class, the rising dividend rate increases the total cash payments to STRC holders over time. STRC Chart (Seeking Alpha) The current valuation picture When you look at the valuation of Strategy, there are two ways to think about it. The first is the normal way, looking at the market cap of the common stock, but you could also include the total trading value of the preferreds as well. Strategy had been trading at a significant premium to its Bitcoin holdings for a while now, but that premium dropped in Q3 as the chart below shows, and has now flipped to a discount in Q4. For this calculation, I have included the US dollar-denominated preferreds, thus the "all-in" market cap. I have excluded the Euro-preferred for this argument. Strategy Bitcoin Premium (Author's Calculation) As of a little before 11 AM on Monday, the total value of Strategy's two common share classes and its four preferred share classes was nearly $53 billion. At that time, the value of its Bitcoin holdings was about $55 billion. Thus, the all-in premium has gone from about 20% in my previous article to negative 4% on Monday. If you attribute a market-based multiple to the company's software business or exclude the preferred share classes, the trading discount becomes even larger. Other than hoping Bitcoin prices rise over time, the other main part of the bull case for Strategy common holders has to do with major index inclusion. With Strategy reporting another quarter of positive net income for Q3, it could allow the stock to become a member of the S&P 500 index, which should trigger a sizable amount of institutional borrowing. However, the pullback in Bitcoin during Q4, if it holds, would likely mean a large quarterly net loss for Strategy, so if the S&P 500 committee doesn't add the name this month, investors might have to wait a while. Final thoughts and recommendation Strategy announced the creation of a cash reserve on Monday in order to fund dividend and interest payments. Instead of diluting common stock investors over time, shareholders were hit with a one-time equity sale, which seemingly is foolish if you think Bitcoin is going to soar moving forward. However, the news does calm some fears about the company's balance sheet, and it will look smart if MSTR shares continue to head lower. With STRC shares continuing to trade a bit below $100, the variable rate dividend was again increased by 25 basis points. At this point, annual payments on the five preferred dividend classes are closing in on $775 million. At the moment, I continue to rate the common stock as a hold. If you are a long-term believer in Bitcoin, it seems likely that Strategy shares would rise over time, but you might be better off just buying Bitcoin directly or through one of the ETFs like the iShares Bitcoin Trust ETF ( IBIT ). I believe that Strategy is going to continue to sell a lot of shares to purchase more Bitcoin, which could provide a headwind to the possible upside here. Should we see Bitcoin prices hold steady or even head higher in the next few quarters, Strategy may be worth a speculative short-term buy then if you believe the S&P 500 committee will add it to the index.
