An Investment that Never Stops Paying You

Rob Carrick was kind enough to quote me in his piece An Investment that Never Stops Paying You:

Think of a perpetual preferred like a corporate bond with no fixed maturity date. Other types of preferred shares have set dates when the issuing company will redeem them at the issue price, usually $25. “Perpetuals could be paying out that dividend as long as you live,” said James Hymas president of Hymas Investment Management and an expert on preferred shares.

One reason why Mr. Hymas likes insurance company perpetuals right now is that they offer a high-yielding and relatively secure flow of dividend income. Preferred shares issued by Sun Life, Manulife and Great-West Lifeco are investment grade, although Standard & Poor’s has Sun Life on negative credit watch. Investment grade means a low probability of default.

Mr. Hymas also sees an opportunity to buy insurance company perpetual preferreds now and benefit from possible rule changes by regulators concerning the financial structure of this sector. Banks have already been subjected to these changes, which largely eliminate the attractiveness for them of raising money by issuing preferred shares. As a result, it’s widely expected banks will gradually redeem their preferred shares over the next decade, including perpetuals.

As far as Sun Life goes, there’s also the worry of a reduction in the common share dividend. Truth is, cutting the amount of cash paid out to common shareholders helps ensure there’s enough money to pay preferred shareholders. But Mr. Hymas said holders of the preferred shares should still expect some turbulence.

“People see a dividend cut and they instantly assume the preferred shares will be affected,” he said. “Typically, what will happen is that there will be a period – six months to a year – where the preferreds are depressed.”

2 Responses to “An Investment that Never Stops Paying You”

  1. mclachlan8 says:

    Hi James: I just wanted to confirm something I believe you said a while ago. Will the Yellow Media YLO.PR.B be converted to Yellow common in
    March ? Seems the time is right to sell them off if so.

    Thank you.

  2. jiHymas says:

    I hope I was never quite so emphatic in a prediction about anything!

    YLO.PR.B cannot be converted until the end of June.

    YLO.PR.A can be converted at the end of March. The company has indicated that they will forestall the retraction for cash in December. It’s therefore a pretty good bet that these will be converted to common sometime in the March-December period and I suggest it is likely that this will be done sooner rather than later.

    It is possible – possible! – that the company will avoid the dilution inherent in such a course of action by putting out an exchange offer; offering to exchange YLO.PR.A for another series of prefs (probably a perpetual that will be considered equity by the accountant) and stating that any YLO.PR.A not tendered will be converted. But that’s speculation.

    The situation with YLO.PR.B is much less clear; it’s not retractible until 2017, so the company is not forced into making a decision. Which doesn’t mean they won’t make one.

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