Toronto-Dominion Bank has announced:
the applicable dividend rates for its Non-Cumulative 5-Year Rate Reset Preferred Shares, Series S (the “Series S Shares”) and Non-Cumulative Floating Rate Preferred Shares, Series T (the “Series T Shares”).
With respect to any Series S Shares that remain outstanding after July 31, 2013, holders of the Series S Shares will be entitled to receive quarterly fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the 5-year period from and including July 31, 2013 to but excluding July 31, 2018 will be 3.371%, being equal to the 5-Year Government of Canada bond yield determined as at July 2, 2013 plus 1.60%, as determined in accordance with the terms of the Series S Shares.
With respect to any Series T Shares that may be issued on July 31, 2013, holders of the Series T Shares will be entitled to receive quarterly floating rate non-cumulative preferential cash dividends, calculated on the basis of the actual number of days elapsed in such quarterly period divided by 365, as and when declared by the Board of Directors of TD, subject to the provisions of the Bank Act (Canada). The dividend rate for the floating rate period from and including July 31, 2013 to but excluding October 31, 2013 will be 2.624%, being equal to the 90-day Government of Canada Treasury Bill yield determined as of July 2, 2013 plus 1.60%, as determined in accordance with the terms of the Series T Shares.
Beneficial owners of Series S Shares who wish to exercise their conversion right should communicate as soon as possible with their broker or other nominee to obtain instructions for exercising such right on or prior to the deadline for exercise, which is 5:00 p.m. (Toronto time) on July 16, 2013.
A rate of 3.371% implies that the break-even rate on 3-month bills (the average bill yield that will result in total dividends over the next five years being equal for both series) is 1.771%, about 75bp over current levels. If we assume that hikes in the Bank of Canada overnight rate are transmitted 1:1 to the 3-month bills market (a very reasonable assumption) this means that there must be six hikes evenly spaced over the next five years in order for the break-even rate to be achieved. This strikes me as a reasonably good bet.
In addition, I suggest that surprises to the upside over the next five years are more likely than surprises to the downside; the Floaters will provide insurance against such a contingency.
Finally, as discussed in the post TD.PR.S To Remain Outstanding, the market seems to have some kind of love affair going on with the only FloatingReset issue outstanding so far, BNS.PR.A, which is currently bid at 25.95, compared to 24.85 for BNS.PR.P, its “Strong Pair” counterpart. If these numbers are input into the Pairs Equivalency Calculator, we find that the break-even three-month bill rate for the BNS P/A Strong Pair is 2.36%. If we then put in the current price of TD.PR.S of 25.11 and jiggle the presumed price of TD.PR.T until we reach the same figure (note that the increments are different!) we solve for a projected price of TD.PR.T of 25.75.
For these reasons I recommend conversion from the extant TD.PR.S to the new Series T.