Category: Miscellaneous News

Miscellaneous News

CIBCWM Likes Prefs

The current issue of Canadian Portfolio Strategy Outlook has a few things to say about prefs:

While trust valuations are likely to bounce back, trust market issuance will be restricted by the new regulations. Hence investors’ search for yield is likely to lead them to new instruments in 2007. A resurgence in preferred share issuance may be one of the new vehicles to pick up the slack.

I’ve been saying this for a while now – every time a trust blew up, in fact – but now the line is being picked up by the majors. I hope that doesn’t mean it’s not likely any more.

An important advantage of preferred shares for taxable investors is that the income, in contrast to the coupon stream from a bond, qualifies for the dividend tax credit. All the more so given Federal tax changes that lowered the effective tax rate on dividend income from 31% to 25% starting this year. Since 2004 preferred shares have offered a higher yield than even long Canada bonds. The average yield at present on Canadian preferred shares is about 5%, versus 4.0% for the GoC 30-year bond and about 4.7% for the typical Canadian corporate bond (Chart 7). However, on an after-tax basis, the spread against the long Canada rises to 150 bps, (Chart 8 ) a huge yield pickup for investors able to tolerate the somewhat larger degree of repayment risk.

I wish I knew where to pick up a basket of good quality prefs yielding an average 5%, but I guess that’s one of the things you learn when you work for a bank. And I think they could have been more specific about taxation. Still – it’s nice to see an organization that has an actual marketting budget talking about these things!

Issue Comments

BCE Trust Conversion and Preferred Offer Now Dubious?

It has just been announced that there will be a tax on trusts. Any trusts created after today will be subject to the tax in 2007; existing trusts will be taxed in 2011.

 This makes execution of the BCE offer to buy their preferreds rather dubious, since it was conditional on their conversion taking place.

Of course, the pref market never fully believed the conversion would take place anyway: see the attached graph of the flatBidPrice of the most active affected issue, BC.PR.C, for this issue’s reaction to the offer. The putative offer price was $26.25, announced October 11.

The market could be very active tomorrow, and not just in the issues affected by the offer! There may well be a stampede of income investors into prefs out of trusts – well overdue, since they should never have been in those things in the first place.

 

Miscellaneous News

PrefBlog Joins Financial Webring!

Readers will have noticed the occasional reference to Financial Webring Forum in this blog – I’ve been participating there for almost as long as it’s been around.

 I have now joined the Webring itself and the Webring Navigation bar to …

  http://www.financialwebring.com/

will now displayed at the footer of this page. I can’t show the navigation bar in this post … it’s a Javascript and my poor little blogging software gets confused … so to see the actual image, you’ll have to skip down to the footer.

I can’t say I agree with all participants in the Webring … not even some of the people all of the time! … but I strongly agree with the ideals!

Miscellaneous News

S&P Inaugurates US Preferred Index!

According to a press release, S&P is commencing the publication of  an index “designed to serve the investment community’s need for an investable benchmark representing the approximately $200 billion U.S. preferred stock market. The S&P U.S. Preferred Stock Index includes preferred stocks issued by U.S. entities that meet criteria relating to minimum size, liquidity, exchange listing, and time-to-maturity. The index currently has 44 constituents, and an indicated yield of 6.48%.”

Well! It’s nice to have competition, although their index is US only! There is more information via http://www.preferredstock.standardandpoors.com/