First Horizon Corporation's Strategic Preferred Stock Redemption and Capital Optimization

Introduction: Strategic Capital Move Amidst Positive Credit Outlook#

First Horizon Corporation (FHN has announced a decisive move to redeem all outstanding Series B Preferred Stock by August 1, 2025, at a redemption price of $25.00 per share. This action is a clear signal of the company's commitment to optimizing its capital structure amid a favorable credit environment, as evidenced by Moody's recent upgrade of FHN's outlook to positive. The redemption of these fixed-to-floating rate preferred shares, which carried a 6.625% dividend yield, is expected to reduce fixed dividend obligations and enhance earnings metrics, positioning FHN for improved financial flexibility and shareholder value.

The timing of this redemption comes as First Horizon navigates a dynamic regional banking landscape marked by evolving interest rate conditions and competitive pressures. By removing higher-cost capital from its balance sheet, FHN aims to better align its capital costs with strategic growth initiatives and shareholder returns, demonstrating prudent financial management.

Understanding the Series B Preferred Stock Redemption#

The Series B Preferred Stock represented depositary shares with a fixed dividend rate of 6.625%, providing investors with steady income but representing a significant fixed-cost burden for First Horizon. Redeeming these shares at $25.00 per depositary share effectively cancels the underlying preferred stock, reducing dividend expenses and the complexity of FHN's capital structure.

Depositary shares serve as tradable instruments linked to preferred stock, offering liquidity and flexibility to investors. Their redemption impacts the company's dividend obligations and capital base, with positive implications for net interest margins (NIM) and earnings per share (EPS).

Financial Context: Capital Structure and Earnings Analysis#

First Horizon's recent financials reveal a company focused on balancing growth with capital efficiency. For fiscal year 2024, the company reported revenue of $4.94 billion and net income of $775 million, reflecting a net income margin of approximately 15.7% (Monexa AI. While net income declined compared to 2023's $897 million, the move to redeem high-cost preferred shares can help mitigate dividend burdens and support margin improvement.

The company's earnings per share (EPS) currently stands at $1.44 with a price-to-earnings (P/E) ratio of 15.06, reflecting moderate valuation relative to its earnings power. Importantly, the dividend payout ratio remains conservative at approximately 44.44%, supporting a sustainable dividend yield of 2.76%.

Impact on Cost of Capital and Net Interest Margin#

The fixed dividend rate of 6.625% on Series B Preferred Stock represented a substantial cost. By redeeming these shares, FHN reduces its fixed dividend obligations, thereby lowering its overall cost of capital. This capital optimization enhances net interest margin, which has shown improvement from 3.12% in 2019 to approximately 3.45% recently, reflecting better interest income relative to interest expense.

The reduction in preferred dividends also improves earnings per share by decreasing fixed costs, freeing capital for growth investments or returning value to shareholders via dividends or share repurchases. This strategic move aligns with broader industry trends where regional banks actively manage capital to adapt to interest rate cycles and regulatory expectations.

Moody's Positive Outlook: Validation of Financial Strategy#

Moody's recent revision of First Horizon's credit outlook to positive highlights confidence in the company's financial health and strategic execution. Key drivers include robust capital buffers, improved asset quality, and proactive capital management exemplified by the Series B Preferred Stock redemption.

This positive outlook is significant as it can facilitate lower borrowing costs and enhance investor confidence, further supporting FHN's growth trajectory. Moody's analysis underscores the strength of regional banks like First Horizon, which benefit from localized economic growth and prudent risk management.

Competitive Positioning Within Regional Banking#

First Horizon maintains a strong competitive stance in its regional markets, supported by strategic initiatives and capital efficiency. The redemption enhances its ability to allocate capital towards technology investments, customer acquisition, and product innovation, vital in a sector facing digital transformation and evolving customer expectations.

Regional banks have been navigating a challenging environment characterized by margin pressures and regulatory scrutiny. FHN's capital optimization and positive credit outlook position it favorably against peers, potentially enabling market share gains and improved profitability.

What This Means For Investors#

Investors should note that the Series B Preferred Stock redemption reduces fixed dividend obligations, potentially leading to increased EPS and improved dividend capacity. The company's prudent capital management may translate into share price appreciation as market perception aligns with improved fundamentals.

However, investors must consider broader market conditions and interest rate environments when assessing timing and strategy. The redemption, while financially beneficial, is one component of FHN's overall growth and capital allocation framework.

Financial Metrics Summary Table#

Historical Context and Strategic Precedent#

First Horizon's capital management is consistent with past strategic actions. The company has historically balanced growth with capital discipline, as seen in its steady dividend payments and moderate share repurchases. The current redemption mirrors prior initiatives aimed at streamlining the capital base to enhance profitability and creditworthiness.

Similar strategies by regional banks during rising interest rate cycles have proven effective in reducing high-cost capital and improving net interest margins, reinforcing the prudence of FHN's approach.

Key Takeaways#

• Series B Preferred Stock redemption at $25 per share removes a 6.625% fixed dividend burden, enhancing capital efficiency.
• Moody's positive credit outlook validates FHN's financial strategy and strengthens market confidence.
• Capital optimization supports improved net interest margins and potential EPS growth.
• First Horizon's competitive positioning in regional banking is bolstered by financial stability and strategic capital allocation.
• Investors may benefit from improved dividend capacity and share price appreciation potential.

What This Means For Investors#

The redemption signifies management's focus on financial discipline and shareholder value creation. By reducing fixed dividend costs, FHN improves its earnings quality and capital flexibility, allowing for reinvestment in growth areas or enhanced shareholder returns. The positive credit outlook further supports this trajectory, potentially lowering funding costs and improving profitability.

Investors should monitor upcoming earnings announcements and capital allocation decisions to gauge the longer-term impact of this strategic move. The redemption, combined with Moody's outlook, suggests a favorable environment for First Horizon to strengthen its market position and financial performance.

Sources:

• GuruFocus News - First Horizon Preferred Stock Redemption
• StockTitan - FHN Preferred Stock Redemption Announcement
• PR Newswire - First Horizon Preferred Stock Redemption Notice
• SEC Filings - First Horizon 10-K Report (June 30, 2025)
• Monexa AI Financial Data