Canadian Money Forum banner

1 - 3 of 3 Posts

·
Registered
Joined
·
14 Posts
Discussion Starter #1
I currrently own HSB.PR.E (5 year fixed reset) prefs with a cost base of near $25.00. The trading price yesterday was $27.55. The dividend rate is 6.6%. My question is: does it make any strategic sense to sell the HSB, realize the gain (which in my case can be offset with capital losses) and then buy a perpetual discount issue such as HSB.PR.C which currently has a 6.3% yield.

I am not experienced in prefs over the longer term. Will the pricing on perpetual discounts behave like bonds if interest rates increase? And for the "fixed resets" what are the factors that will determine if they will be redeemed at the 5 yr mark? tks
 

·
Registered
Joined
·
546 Posts
You need to learn how to incorporate the capital loss into your valuation, and how to 'think' like the corporation in anticipation of their actions (learn about pref shares).

Yes, the pricing on perpetuals will act the same way bonds do if rates increase. They will swing more widely because they have a longer "duration" (look that up on Wiki).
 

·
Registered
Joined
·
26 Posts
Remember that the reset prefs will be redeemed at $25 after 5 years, so you will lose the current nice premium if your hold them. You lose $2.5 over less than 5 years or about 0.50 per year, 2% per year. so your effective interest rate is around 4.5%. In the meantime you pay tax on the full dividend.

The reset prefs are much like a short term bond - in all likelihood you will be paid out in 5 years. They are structured such that there is no obligation to pay them out, and indeed no obligation to pay dividends, but there is a strong incentive to pay out as they reset to an attractive dividend rate, a rate higher than a healthy bank would want to pay. That allows them to be included in the banks capital and increase the capital ratio of the bank. In practice, they will be paid out unless the bank is in trouble in 5 years.

The C prefs are perpetual - they will probably never be paid out. Their value is only the dividend, so they will swing much wider in price depending on interest rates. Many folks believe that interest rates must go up in future years to mop up all the money that the fed has created to avert a melt-down. If that happens, perpetual prefs will go down even more than long term bonds.
 
1 - 3 of 3 Posts
Top