The effect of changes in Prime is interesting … but the reported effect of changes in Prime is even more interesting! I received an inquiry today:

I have been trying to learn more about preferred shares and find the whole matter of floating rates quite perplexing.If you would kindly spare me just a moment of your time, would you please explain briefly (again I don’t want to take up much of your time) how the following dividend yield from the globeinvestor.com website is arrived at for the BPO Properties stock with a floating rate listed below.

Using BPP.PR.G as an example.

The following dividend information is provided on the globeinvestor.com site:

Annual Div. 0.61 Yield 5.90

The following Annual Dividend information comes from your http://www.prefinfo.com/ website:

Floating Rate Start Date : 2001-05-07

Floating Rate Index ID : Canada Prime

FR Formula : 70% of index (#3)

How please is the listed 5.90% yield ($0.61/share) arrived at? This amount seems to be higher than the (if I am correct) present 2.25% Canada prime rate.

I thank you in advance for your assistance.

BPP.PR.G closed last night at 10.50-bid, but pays its dividend on the issue price of $25.00. The Globe (and virtually everybody else) reports the Current Yield, which is the annual dividend divided by the market price; but they use historical dividend.

Thus, the dividend paid for BPP.PR.G is 2.25% [Prime] x $25.00 [Par Value] x 70% [Fraction of Prime Paid] = $0.39375 and the price is $10.50 so the current yield – as reported by Hymas Investment – is 3.75%.

Trouble ensues when prime drops precipituously. The projected quarterly dividend based on Prime of 2.25% as calculated above is just under ten cents. But the recent dividend history of BPP.PR.G is:

BPP.PR.G, Recent Dividends |
|||

Ex-Date | Record Date |
Pay-Date | Amount |

2008-07-29 | 2008-07-31 | 2008-08-14 | 0.266610 |

2008-10-29 | 2008-10-31 | 2008-11-14 | 0.207813 |

2009-01-28 | 2009-01-30 | 2009-02-14 | 0.196994 |

2009-04-28 | 2009-04-30 | 2009-05-14 | 0.153601 |

Total |
0.825018 |

When we divide the total for the last four quarters – which we note is more than double the amount we expect going forward – by the price of $10.50, we get 7.86% But that’s not where the Globe gets its dividend from.

As far as I can tell, the Globe has estimated the annual dividend going forward by multiplying the previous quarterly dividend of $0.153601 by four; that results in an estimate of 0.614404 and an estimated Current Yield of 0.614404 / 10.50 = 5.85% which, I suppose, the Globe rounds to 5.90%.

I remarked on the effect of the precipituous decline in prime during my Seminar on Floating Rate Issues (which is available for purchase) … but I confess, the idea that buyers could be trading based on yields reported by the Globe calculated in such a manner was something I missed completely!

I congratulate my interlocutor for checking the Globe’s reported yield!

[…] index on both credit and volume concerns. BPP.PR.G was last mentioned on PrefBlog in the post What is the yield of BPP.PR.G?. BPP.PR.J and BPP.PR.M were last mentioned in BPO & BPP: S&P Revises Outlook to […]