BCE.PR.T to Reset Dividend Rate to 3.393%

BCE Inc. has announced (emphasis from original):

BCE Inc. will, on November 1, 2011, continue to have Cumulative Redeemable First Preferred Shares, Series T outstanding if, following the end of the conversion period on October 18, 2011, BCE Inc. determines that at least one million Series T Preferred Shares would remain outstanding. In such a case, as of November 1, 2011, the Series T Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend for the following five years that will be based on a fixed rate equal to the product of: (a) the yield to maturity compounded semi-annually (the “Government of Canada Yield”), computed on October 11, 2011 by two investment dealers appointed by BCE Inc., that would be carried by Government of Canada bonds with a 5-year maturity, multiplied by (b) the “Selected Percentage Rate” for such period.

The “Selected Percentage Rate” determined by BCE Inc. for such period is 215%. The “Government of Canada Yield” is 1.578%. Accordingly, the annual dividend rate applicable to the Series T Preferred Shares for the five-year period beginning on November 1, 2011 will be 3.393%.

So it turned out higher than my September estimate of 3.12%, due to the increase in the Five-Year Canada yield in the interim. The annual dividend will be 0.84825 commencing November 1, down dramatically from the issue rate of 1.1255, which will probably cause some angst.

As previously noted, BCE’s deadline for conversion to and from BCE.PR.S, the RatchetRate half of this Strong Pair, is October 18, so anybody seeking to switch had better get cracking. I recommend that investors hold, or convert to, BCE.PR.T. While the chances of prime averaging more than 3.393% for the next five years are pretty good, it will be remembered that BCE.PR.S can only be relied on to pay 100% of prime for as long as the price remains below 25.00. If the price goes much above par, the percentage of prime paid will drop – which means total dividends may be less than what will be paid on BCE.PR.T even if prime averages, say, 4.00%.

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