PrefBlog

Desperate for copy, the Financial Post published a column titled Banks’ preferred shares not a sure thing today, which was brought to my attention by Assiduous Reader tobyone in the comments to March 31:

In the April 01 edition of the Financial Post freelance financial journalist Hugh Anderson’s article: “Banks’ preferred shares not a sure thing.” Raises the spectre of dividend cuts, failure of trustcos and regional banks in Canada in the past. I thought I had a sure thing once upon a time but I was mistaken.

Hugh Anderson bills himself as “a freelance financial journalist and a former retail investment advisor”. I am unable to ascertain his performance track record as a retail investment advisor.

The introduction to his article was what first aroused my ire:

Time was when selling a Canadian bank preferred share to a conservative client in a taxable account was a no-worries deal, as the Australians say.

You looked for an issue with a reasonable period until first call without much premium and a decent yield, and moved on to the next client.

That’s all it took, eh? “Reasonable”, “much”, “decent” … not even a mention of credit quality … one shudders to think what his performance was like … but as far as preferred share commentary goes, it’s not the worst I’ve ever seen. If that was the only problem with the column, I’d let it go.

The following display of typical retail stockbroker nonsense, though, really makes me angry:

Remember also that a holder gets that yield only while the bank maintains its dividend. Too many investors forget that a preferred share is not a bond or a deposit note, even when issued by a Canadian bank. Dividends on preferred shares are no more guaranteed than dividends on common shares. In extreme circumstances they are much easier to cut or eliminate than interest payments on debt securities.

Unthinkable, you say. Maybe, but I do remember that being said about certain big trust companies in Canada a decade or two ago, before they eliminated dividend payments on their way to collapse or absorption.

A similar fate awaited shareholders in two Canadian regional banks a while ago.

Nothing is absolutely unthinkable at a time when a venerable U.S. investment bank implodes over a weekend, and when the U.S. Federal Reserve is keeping others alive with unlimited credit.

Well, lets look at this step by step:

Dividends on preferred shares are no more guaranteed than dividends on common shares.

Yes they are, in so far as one can use the word “guarantee” (which isn’t very far). Every preferred share prospectus I’ve ever seen has included the provision that dividends on common cannot be paid unless the company is paying dividends on the preferreds. If a company wants to save some money on its dividend payments, the common will get hit first.

In extreme circumstances they are much easier to cut or eliminate than interest payments on debt securities.

This part is true.

I do remember that being said about certain big trust companies in Canada a decade or two ago, before they eliminated dividend payments on their way to collapse or absorption.

Everything else said in this column is forgivable. This isn’t. Mr. Anderson provides no analysis or comparatives to show that these are, or could be, related events. What’s the point here? That it is possible for companies to default? We know that, Mr. Anderson – what we’re concerned about, first, last and always, is the probability of default.

This sentence shows Mr. Anderson’s experience as a retail stockbroker: no analysis, no perspective, nothing but the airy whipping up of fear in order to appear wise – with just barely enough factual backup to provide plausible excuses for underperformance.

Assiduous Reader kaspu in the previously mentioned comments said it best:

“I thought I had a sure thing once upon a time but I was mistaken.”

With respect, there is never, ever, EVER, a sure thing.

Quite right. There is never, ever, EVER a sure thing. So you do your homework, in order to tilt the odds in your favour; and you diversify – because even if your analysis is perfect today (which it won’t be … all we can ever hope for is an analysis that’s pretty good), something might happen tomorrow.

In his efforts to cause alarm amongst his readers, Mr. Anderson has done them a grave disservice. Risk should never be discussed without attention paid to its minimization, especially in an article targetted towards inexperienced investors. What mother, for instance, would send a child to school with the warning that a car might hit them? Wouldn’t most mothers, at their most explicit, say “Look both ways before crossing, because a car might hit you”?