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So I am fairly new to this forum
have been self investing for a few years
and decided to purchase some blue chip preffered shares (enb,trp,bam )etc for fixed income
these shares have been a total disaster as far as I can see
can anyone explain why?
 

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There is a series of useful articles on preferreds on Canadian Couch Potato

http://canadiancouchpotato.com/

They are complex beasts, but the main mark against them is that since the issuer can redeem them at a set price, that defines the absolute upper limit on their price. So for the investor the up-side is capped and may not be very substantial, but the downside, if the value slides, is open ended. The only way I mess with them is via ZPR and PFF and those are a small part of my portfolio.
 

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That's a subscriber-only one.
Sorry, forgot about that. Here's the basics:
Well, don’t look now but a whole whack of preferred shares – specifically rate-reset preferreds that have come to dominate the market – could soon take a hatchet to their payments.

This will come as a surprise to investors who depend on the predictable cash flow of preferreds, but Mr. Hymas has done the calculations and they paint a grim picture. In the next year or so, he expects many rate-reset preferreds to slash their dividends by 25 to 45 per cent. Depending on what happens to bond yields, many more rate-reset preferreds will likely reduce their dividends in coming years.

The preferred share market is already pricing in the bad news. For example, the iShares S&P/TSX Canadian Preferred Share Index ETF (CPD), an exchange-traded fund that invests in a broad basket of preferreds, has dropped nearly 7 per cent since mid-November. The BMO S&P/TSX Laddered Preferred Share Index ETF (ZPR), which invests exclusively in rate-resets, has fared worse: It’s down more than 10 per cent.
 

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I've never liked preferred myself but maybe I don't fully appreciate the benefits of them.

You have bond-like risk, exposure and you have less capital appreciation when compared to common stocks. I don't see either of these as good things.
 

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thankx so much greatlaker

re your quote summary (below) i'm asking myself what might the issuers do to their common shares, once they're done whacking dividends on the rate resets? mightn't they tend to whack common dividends even before they whack the preferreds?
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Well, don’t look now but a whole whack of preferred shares – specifically rate-reset preferreds that have come to dominate the market – could soon take a hatchet to their payments.

This will come as a surprise to investors who depend on the predictable cash flow of preferreds, but Mr. Hymas has done the calculations and they paint a grim picture. In the next year or so, he expects many rate-reset preferreds to slash their dividends by 25 to 45 per cent. Depending on what happens to bond yields, many more rate-reset preferreds will likely reduce their dividends in coming years.
 

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I've never liked preferred myself but maybe I don't fully appreciate the benefits of them.

You have bond-like risk, exposure and you have less capital appreciation when compared to common stocks. I don't see either of these as good things.
+1 from me

i think that 5% is good for people that need income and have high income's where they will derive tax advantages

other than than in that situation, i would avoid preffereds
 

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wy we talkin about preferreds?

imho the question is are the rate resets going to act like canaries in coal mines?

i thought the usual sequence was cut common dividends, then start cutting the preferreds, going class by class.

can ya'll imagine what a broad spectrum common dividend cut would do to everybody, right across the board. From the canada pension plan all the way down to the brand new college graduate with $7k saved up in canadian equity e-fund.

in 08/09 investors went berserk with worry that the bank of montreal might cut its common dividend. They were worried about other dividend payors as well but it was rumoured at the time that, among the banks, the big blue was the one closest to a real cut. There was panic in the streets. I believe BMO's common share price hit $25.
 

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re your quote summary (below) i'm asking myself what might the issuers do to their common shares, once they're done whacking dividends on the rate resets? mightn't they tend to whack common dividends even before they whack the preferreds?
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Think you may be misunderstanding the 'cutting' of pref dividends on fixed resets. Rate resets are generally issued at a dividend rate for 5 years, but then reset for another 5 years at a rate related to 5 yr GoC bond yields. If the bond yield is way down, then the new dividend rate is correspondingly down. Given the yield on GoC5 bonds has come down significantly in the last 5 months, there is some concern this yield curve may be stuck low for some time. Hence the 'renewal' rate for the resets could be lower too.

Example: A new fixed reset might have been issued last year at 4.25% eligible dividend rate when GoC5 was 1.5%, with a reset rate of GoC5 + 275 bp in 2019. The 275 bp is meant to equate to 275 + 1.5% GoC5 = 4.25% (just like the initial dividend yield).

But what if GoC5 is only 0.7% in 2019? That pref would reset at 0.7 + 275 = 3.45%.... quite a bit lower than the initial 4.25% rate. That is what is meant by a 'cut' in dividend rate. Some fear of that will drive the original issue price of $25 down to a price that compensates for the risk of that lower yield in 2019.

On the other hand, if GoC5 bond yield moves up to 3%, that pref would then reset at 275+3 = 5.75%. The issuing company might be okay with that but if the company feels it could find new capital at 4.25%, then it would 'call' the existing resets at a price of $25 and issue new prefs at 4.25%. Thus the comment about limited upside but considerable risk of downside....especially if bought near par of $25. The key is to buy fixed resets cheap today at $16-22 on the open market so that one is protected on the downside and still get a decent yield. The issue of course is direction of GoC5 bond yields.
 

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altaRed i do understand all this!

the quoted language from mr Hymas of preflet fame is grim, draconian. He is a responsible & conservative analyst, one who is not in the habit of issuing warnings of this magnitude:

Mr. Hymas has done the calculations and they paint a grim picture. In the next year or so, he expects many rate-reset preferreds to slash their dividends by 25 to 45 per cent
if rate reset dividends drop by a percentage as great as 25-45%, what i am wondering is how widespread the repercussions could be. I don't see the investing public responding calmly to such events. Common share prices could drop, common dividends could once more be put at risk.

was it not gluskin's david rosenberg who said, 4 or 5 years ago, that dividends were somewhat like bond interests on steroids but sooner or later the twain would have to meet. Either interest rates would have to rise or else dividend rates would have to fall. As i recall, he meant common share dividends.
 

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wy we talkin about preferreds?
... 'cause the OP is looking at them (or bought them) ... which prompted the question.


... imho the question is are the rate resets going to act like canaries in coal mines?
i thought the usual sequence was cut common dividends, then start cutting the preferreds, going class by class.
I've heard of the preferreds resetting their rates and/or being recalled where nothing was happening on the common share side at all.
As I understand it, it's one of the downsides to them ... too much of a gain or change in the environment triggers the company to make changes resulting in the investor losing out and having to find another place to put their money.

I've also heard of preferred's having liquidity issues.


I'd rather use the common stock to share the risk & gain.


... in 08/09 investors went berserk with worry that the bank of montreal might cut its common dividend. They were worried about other dividend payors as well but it was rumoured at the time that, among the banks, the big blue was the one closest to a real cut. There was panic in the streets. I believe BMO's common share price hit $25.
I recall far more of talk that as the Canadian banks automagically had to be in lock-step with the US banks - the Canadian banks would be toppling over in a week or two. This also drove dividend cut fears but the dividend cut was the mouse to the bankruptcy elephant for the articles I read and people I talked to.

According to Yahoo, it looks like just over $24 was the low ... I didn't buy in until $29.


... if rate reset dividends drop by a percentage as great as 25-45%, what i am wondering is how widespread the repercussions could be. I don't see the investing public responding calmly to such events. Common share prices could drop, common dividends could once more be put at risk.
How many in the public know what a preferred share is or track when it's reset/cancelled?
How many in the public have any idea where there's so many RY or TD listings in the stock tables?

I don't recall anyone noticing or commenting in previous years for the preferred's ... only the common.


Cheers
 

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How many in the public know what a preferred share is or track when it's reset/cancelled?
I don't recall anyone noticing or commenting in previous years for the preferred's ... only the common.

it's so easy to belittle, isn't it? but i still believe that, if Hymas is correct & preferred divs are cut by 45%, investors will sit up & take notice. Event of such magnitude would not be a normal or ordinary reset.
 

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This is principal-agent issue. Common shareholders, preferred shareholders and bond holders are not aligned. What hurts bond holders (I'll put pref shareholders in this camp as well since in my mind they are essentially junior creditors) often helps common shareholders (and vice versa). I don't see how changes to pref dividends impact common shareholders.
 

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it's so easy to belittle, isn't it?
People's eyes glaze over when talking about basic finance or common stock or REITs ... there's threads on CFM identifying this as common ... CMF has more experienced investors where there's almost no threads about preferred shares ... this thread has different ideas about preferred shares ...

It seems clear that it is not a well known area here on CMF so it does not seem a stretch (or belittling IMO) to think the public knows little and/or is paying even less attention. If there's some proof otherwise, I'm happy to listen.


... but i still believe that, if Hymas is correct & preferred divs are cut by 45%, investors will sit up & take notice. Event of such magnitude would not be a normal or ordinary reset.
Without knowing who owns them and is paying attention to them ... it may take a while.

Did anyone notice that of the C$10 bln with resets in 2014, just over 80% or $8 bln were redeemed?
Of that, $5.8 bln called were from the Big 6 Canadian banks and only $0.7 bln of the bank issues were reset to the new rate or converted to the floater.

All this redemption left a large hole in the fixed-reset market, so what filled it?

The new issue market was very active in 2014 with ~$12 bln sold. With respect to the Big 6 Banks, just over $5 bln was issued.

http://www.raymondjames.ca/lewisrosen/preferred.aspx


The banks redeemed then re-issued roughly the same amount so I'm thinking there must be a nice drop in the dividends to compensate for the costs versus letting the new rate kick in.


Cheers
 

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so if I could buy enbridge 4% with a 4 year recall to rate reset, for $19.00 that would make sense?
the $1.00 dividend would equal 5.3% is that correct?
Yes--until the reset. But assuming interest rates remain where they are (ie. low), the dividend will be reset to around 2-3%. At 2.5%, the annual coupon is $0.625. However, the new price of the pref would have to be updated to reflect current yields (say 4.5%). This would mean the price of the pref would drop to 0.625/0.045 = $13.89. So between now and the reset date, the pref will trend towards $13.89. Yes, you'll be getting a higher yield, but it will be offset by a decrease in the pref itself.
 

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Think you may be misunderstanding the 'cutting' of pref dividends on fixed resets. Rate resets are generally issued at a dividend rate for 5 years, but then reset for another 5 years at a rate related to 5 yr GoC bond yields. If the bond yield is way down, then the new dividend rate is correspondingly down. Given the yield on GoC5 bonds has come down significantly in the last 5 months, there is some concern this yield curve may be stuck low for some time. Hence the 'renewal' rate for the resets could be lower too.

Example: A new fixed reset might have been issued last year at 4.25% eligible dividend rate when GoC5 was 1.5%, with a reset rate of GoC5 + 275 bp in 2019. The 275 bp is meant to equate to 275 + 1.5% GoC5 = 4.25% (just like the initial dividend yield).

But what if GoC5 is only 0.7% in 2019? That pref would reset at 0.7 + 275 = 3.45%.... quite a bit lower than the initial 4.25% rate. That is what is meant by a 'cut' in dividend rate. Some fear of that will drive the original issue price of $25 down to a price that compensates for the risk of that lower yield in 2019.

On the other hand, if GoC5 bond yield moves up to 3%, that pref would then reset at 275+3 = 5.75%. The issuing company might be okay with that but if the company feels it could find new capital at 4.25%, then it would 'call' the existing resets at a price of $25 and issue new prefs at 4.25%. Thus the comment about limited upside but considerable risk of downside....especially if bought near par of $25. The key is to buy fixed resets cheap today at $16-22 on the open market so that one is protected on the downside and still get a decent yield. The issue of course is direction of GoC5 bond yields.
@AltaRed. This is an excellent explanation of the mechanics of the rate resets of pref shares. thanks.
 

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@AltaRed. This is an excellent explanation of the mechanics of the rate resets of pref shares. thanks.
Just to be clear/transparent, there are a lot of other dynamics/nuances at play that affect pricing, but what I mentioned are the basics. Credit quality is a considerable one. ENB issues suffered pricing drops when they announced the upcoming big drop of assets into ENF for example. That deal was good for common shareholders but not so good for bond or pref share holders (credit quality deterioration). Prefs from the likes of EMA and PPL are sub-investment grade (despite the love affair with the commons). Fun, eh?
 

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... So between now and the reset date, the pref will trend towards $13.89. Yes, you'll be getting a higher yield, but it will be offset by a decrease in the pref itself.
CIBC Wood Gundy's Feb 2015 preferred share report was identifying that where usually preferred shares like a rate drop, the preferred share index was down 2.7% while REITs were up 1% (had been up 3.5%) and common stock was up 5.9%. Their claim was that with 67% of the index being of the fixed-reset type - investors were driving the value down as they worry that resets in the short term will have an unacceptably lower rate.


Cheers
 
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