Lowly preferred shares an intriguing bet for the brave investor

Rob Carrick was kind enough to quote me in his recent article Lowly preferred shares an intriguing bet for the brave investor:

For some ideas on finding value in the preferred share market, let’s check in with two money managers. One is James Hymas, president of Hymas Investment Management, and the other is Dustin Van Der Hout, a portfolio manager with Richardson GMP. Both suggest investors look to the hardest-hit part of the pref market, rate resets.

Mr. Hymas’s quick and easy option for capturing a rebound in rate resets is the BMO Laddered Preferred Share Index ETF (ZPR), which has fallen almost 43 per cent over the past three years on a cumulative basis and now yields a bit over 6 per cent.

Alternative choices are the iShares S&P/TSX Canadian Preferred Share Index ETF (CPD) and the PowerShares Canadian Preferred Share Index ETF (PPS), which track an index that is dominated by rate resets but also includes other preferred types. “These ETFs are a very good alternative for somebody who does not have enough time to do a lot of research,” Mr. Hymas said.

For investors seeking individual shares, Mr. Hymas highlighted three particular preferred share issues from insurers. Each traded in the $12 to $13 range at midweek, down from their issue price of $25, and each is down for similar reasons. They have either had their dividend reset recently at levels that are much below what they were when the shares were issued, or they will in the not-too-distance future.

Why buy those hard-hit shares from Manulife, or similar issues from Sun Life Financial and Great-West Lifeco?

Mr. Hymas said there’s potential for regulators to change the rules for insurance companies so that it’s less attractive for them to issue preferred shares. If that happens, these shares could be redeemed at $25, which is close to double their current share price. “I can give you chapter and verse on why I think this rule change is going to happen,” he said. “Basically, the market is essentially ignoring the possibility.”

Warning: Mr. Hymas said the price of these shares is heavily influenced by the five-year Canada bond yield. If it goes up, that’s helpful. If bond yields fall further, then there will be more downside for these already hard-hit shares.

Here’s what they came up with based on a mix of dividend yield and the potential to be redeemed at a future date at the issue price of $25.

Share Issue & Ticker Recent Price ($) Curr. Yield (%)* Next Reset Dividend Reset formula is the 5-yr Canada bond yield plus this premium (% points) Yield based on current share price and projected dividend reset using a recent 5-yr Canada bond yield (%)
James Hymas, president of Hymas Investment Management
Great-West Lifeco Series N GWO.PR.N-T 12.82 4.4 Dec. 2020 1.3 3.5
Manulife Financial Series 3 MFC.PR.F-T 12.22 8.4 Jun. 2016 1.41 3.9
Sun Life Financial Series 8R SLF.PR.G-T 13 4.4 Jun. 2020 1.41 3.7
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