There’s a thread in Financial Webring Forum now titled Practically guaranteed to lose money that points out (as of September 8):
As I write, ACO.PR.A (TSX) is bid at 27.00.Atco can call this issue at 26.00 plus 0.36 in dividends on 2008-12-01.
PrefInfo tells us the redemption schedule is:
- Redemption 2008-12-01 2009-11-30 26.000000
- Redemption 2009-12-01 2010-11-30 25.500000
- Redemption 2010-12-01 INFINITE DATE 25.000000
and that the retraction schedule is
- Retraction 2011-12-01 INFINITE DATE 26.040000
The annual dividend is 1.4375, paid quarterly, with the last ex-date 2008-8-1 according to tmxmoney.com.
So: here’s the question … how might a rational investor reason that paying $27.00 for this issue has enough chance of at least a half-way decent return to make it worth while? This investor knows that the yield to worst is negative and that he’s taking a chance … why might he buy it anyway?
The answer is buried in one of my articles (click on the green squares down the right-hand margin of this blog). Only casually referred to … but it is there.
The best answer (or the first one that precisely matches my answer!) in the comments will get a free copy of the PrefLetter that will be published this weekend. Judge’s decision is final. Everybody’s eligible, even those poor benighted souls who don’t live in Ontario, because I’m not going to charge the winner for it. Contest closes immediately prior to my sending out this month’s issue, which will probably be sometime Sunday afternoon … but it could be anytime between 4pm Friday and 9:30am Monday.
Very clever, James. I hadn’t thought of that.
But the extra options disappear in 2010 at the latest, so the yield to worst is still crap. (Some lunatic paid as much as 27.63 yesterday. That is a guaranteed loss.)
I did not find the best matching answer in the green box articles, but I did find a pretty close on in http://www.prefblog.com/?p=80
Here are the figures for this case (shamelessly copied and adapted from the post above):
With an annual coupon of about $1.36 and with the company having the chance to save $1.00 by waiting until the end of November, 2010 to redeem these shares, they may be around for another two years, no matter what the term until the YTW scenario. From an investor’s perspective, however … Who’s putting a bid on these things???? The most likely scenario has the pre-tax cash flow analysis as of 09-Sep-2008:
* 2008-11-01 DIVIDEND 0.359375 0.3583
* 2009-02-01 DIVIDEND 0.359375 0.3564
* 2009-05-01 DIVIDEND 0.359375 0.3546
* 2009-08-01 DIVIDEND 0.359375 0.3527
* 2009-11-01 DIVIDEND 0.359375 0.3509
* 2010-02-01 DIVIDEND 0.359375 0.3490
* 2010-05-01 DIVIDEND 0.359375 0.3472
* 2010-08-01 DIVIDEND 0.359375 0.3453
* 2010-11-01 FINAL DIVIDEND 0.359375 0.3435
* 2010-12-01 MATURITY 25.00 0.933925 23.8512
* Total Cash Flows 28.23
* Total Present Value 27.01
* Discounting Rate 2.06% (Annual rate) = 0.515% (quarterly)
Sorry, at these puny rates compounding does not make a significant difference.
which doesn’t look all that great to me!
two minor corrections – annual dividend is about $1.44
and the MATURITY line has some extra figures in it, should be
* 2010-12-01 MATURITY 25.00 23.8350
Sorry, I forgot about the final dividend for the extra month (I’m too lazy to check the prospectus for the exact calculation, I’m adding an extra 1/3 div to the final payment):
* 2008-11-01 DIVIDEND 0.359375 0.3582
* 2009-02-01 DIVIDEND 0.359375 0.3561
* 2009-05-01 DIVIDEND 0.359375 0.3541
* 2009-08-01 DIVIDEND 0.359375 0.3521
* 2009-11-01 DIVIDEND 0.359375 0.3500
* 2010-02-01 DIVIDEND 0.359375 0.3480
* 2010-05-01 DIVIDEND 0.359375 0.3460
* 2010-08-01 DIVIDEND 0.359375 0.3439
* 2010-11-01 FINAL DIVIDEND 0.359375 0.3419
* 2010-12-01 MATURITY 25.11979 23.8497
* Total Cash Flows 28.35
* Total Present Value 27.00
* Discounting Rate 2.27% (Annual rate)
(still pretty unattractive, to put it mildly)
[…] recently had a contest about ACO.PR.A which has been won by Assiduous Reader […]
[…] should be considered a bonus. Assiduous Reader adrian2 won a PrefLetter some time ago when I had a contest about the analysis of issues with a negative yield-to-worst. The explanation referred to ACO.PR.A, but it can be applied to […]