STRC: The Perpetual Preferred That Short Sellers Are Actually Thankful For

Every fresh share of STRC that Strategy (formerly MicroStrategy) dumps into the market is a perpetual claim on the company's cash flow. And that little detail has hedge funds rubbing their hands together when they look at MSTR common stock—imagine a golden retriever discovering the cookie jar has no latch.

For the uninitiated: Strategy is a bitcoin acquisition vehicle that shovels most proceeds from any and all share sales directly into $BTC. MSTR has no upside ceiling and unlimited price appreciation potential to punish short-sellers. But that hasn't stopped plenty of traders from shorting it anyway. Short interest on MSTR currently exceeds 35 million shares, representing a rather alarming 11% of the float. Apparently "unlimited upside" is just marketing copy for people who haven't checked a price chart lately.

Here's where things get spicy. A chunk of that MSTR short interest might trace back to its unhealthy relationship with STRC.

STRC is Strategy's quasi-pegged perpetual preferred that pays a variable 11.5% annualized dividend and likes to hang around the $100 neighborhood. It wobbles within 10% of that band during its lifespan. Meanwhile, MSTR pays precisely zero dividends and bounces around like a lithium battery in a tumble dryer—mostly downward over the last 18 months, having lost half its value over the past year. STRC holders collecting their 11.5% yield while MSTR holders watch their principal perform like a JPEG of a rock in 2022.

There's roughly $5.3 billion worth of STRC outstanding, burning through $609 million in annual dividend payouts in cold, hard USD. The small problem? Strategy absolutely cannot fund those payouts from regular business profits, which have been in decline for years. Their software business is so last decade—these days it's all about printing preferreds like it's 2008 and they're a regional bank.

Rather than fixing their software business, management is reportedly "laser focused" on flogging more STRC. CEO Phong Le has admitted the company plans to pivot away from at-the-market MSTR issuances in favor of perpetual preferred offerings. Nothing says "laser focused" like pivoting from one dilution machine to a slightly different dilution machine.

Here's the kicker: those preferred shares like STRC create obligations on the assets owned by MSTR. Each new STRC issuance perpetually siphons dollars from Strategy—dollars that are collectively owned by MSTR, after STRC's more senior claims. It's like having a roommate who pays rent, but then a second roommate shows up who also gets first dibs on the fridge, forever.

Strategy owes $609 million per year in STRC dividends, and that cash has to come from somewhere. For years, it's mostly been coming from MSTR ATMs. So every new STRC share increases Strategy's annual cash dividend obligations. The company is essentially running a charity where MSTR shareholders are the donors.

Since the company generates negligible to negative earnings, the market expects those obligations to be funded by MSTR share dilution as a last resort—given MSTR's preeminence as the most popular, liquid, and indexed security of the company.

Translation: STRC creates an expectation of predictable MSTR dilution that short sellers can front-run. Meanwhile, the success of STRC at attracting capital is somewhat at the expense of demand that might otherwise bid for MSTR. Rather than shareholders buying MSTR because they believe in Strategy's mission, STRC buyers benefit MSTR only in a one-time purchase of $BTC—then siphon cash out of the company forever. It's like hiring someone to bring you coffee, but they keep the coffee and just send you a thank-you note.

Now, short-sellers might be right about ongoing MSTR dilution, but STRC dividends aren't exactly set in stone. Strategy's board declares dividends at its sole discretion. The dividend rate is variable, and while it's only gone higher since inception, the board can technically reduce it by 25 basis points plus certain declines in SOFR. So there's technically a scenario where STRC holders get paid slightly less—but let's be real, if they cut that dividend, STRC drops below $100 and the whole house of cards wobbles.

Strategy can fund dividends from any legally available cash, not just MSTR sales. That means further STRC issuances, sales of other preferred shares, traditional debt, or other capital raises. Basically, the company's paying credit card rates to keep STRC hovering near $100. At this point, they're basically the person who