Assiduous Reader BS writes in and says:
I am one of your newsletter subscribers. I currently own quite a bit of BNA.pr.D (on your advice, thank you!) and I see that it will be redeemed this July 9th. I have read through the prospectus but I’m quite new to preferred shares and I’m not exactly sure what will happen in July.
The Company will redeem all outstanding Series 4 Preferred Shares on July 9, 2014 for a cash amount per share equal to the lesser of (i) $25.00 plus any accrued and unpaid dividends and (ii) the Net Asset Value per Unit.
There is a dividend payable on June 7 (record date about May 19) and then on July 9th I will receive the $25.00 but is there any dividend payments that will accrue between June 7 and July 9 ?
If there is more dividend coming, would it be equal to about… $25 x 7.25%/year x 32 days/365days/year = $0.16
The shares are trading today at about $25.03 which seems too high if you’re only going to get $25 on July 9th and too low if you’re going to get $25.16 on July 9th. I’m confused!
If there’s no more dividend coming, should I be trying to sell now if I can get over $25.00?
Any advice you can give me would be greatly appreciated.
Geez, I hate these questions – and, as it turns out, I’ve answered this one before. You have to look at the prospectus, you have to determine what happened years ago, you have to do intricate day counts and if you get one little thing wrong you look like an idiot. So first off, I’ll say that since this is a factual question, you’re really better off asking the company’s Investor Relations department. They’re the ones who should not only know this, but really should be publicizing this well in advance. But they aren’t. So … once more into the breach, dear friends!
We first have a look at the prospectus, which is on the company’s website:
Holders of the Series 4 Preferred Shares will be entitled to receive quarterly fixed cumulative preferential dividends of $0.453125 per Series 4 Preferred Share. On an annualized basis, this would represent a yield on the offering price of the Series 4 Preferred Shares of 7.25%. Quarterly dividends on the Series 4 Preferred Shares will be paid by the Company on or about the 7th day of March, June, September and December in each year. Based on the anticipated closing date of July 9, 2009, the initial dividend (which covers the period from closing to August 31, 2009) is expected to be $0.26318 per Series 4 Preferred Share, and is expected to be paid on or about September 7, 2009 to holders of record on August 21, 2009.
Step 1: Understand the Initial Dividend
OK, there’s a lot of dates here, but only two of them are critical. The initial dividend covers the period from July 9, 2009, to August 31, 2009. That’s 53 days, and the amount paid is $0.26318, so we annualize that (365/53) * 0.26318 = 1.812466, which is a yield of 7.24986% on the $25 par value. To five significant figures everything works perfectly, so we’ve accomplished Step 1.
The dividend is paid in arrears, but we don’t care, at least not for this purpose. The main thing is that the first dividend was paid to include August 31, 2009, and on September 1, 2009, there was one day’s coupon accrued. On September 2, 2009, there were two day’s accrued. On September 3 …
Step 2: Understand the Most Recent Dividend
The last dividend paid had an ex-date of May 20, 2014 and was paid June 7; the dividend amount was $0.453 (according to the TMXMoney.com website) or $0.453125 (according to the prospectus). Now the thing is, dividends are paid quarterly and the first dividend took us up to the end of August, 2009. THEREFORE the last dividend took us up to the end of May, 2014. So we can say that the dividend which will be paid On or about the 7th day of Mar., Jun., Sep. and Dec. is the dividend that was earned up until May 31, 2014.
It is, again, paid in arrears and the ex-date was in advance, but for this purpose we don’t care.
Step 3: Understand the Final Dividend
Remember the last paragraph of Step 1? on September 1, 2009, there was one day’s coupon accrued. On September 2, 2009, there were two day’s accrued. On September 3? Well, we repeat that starting with …
On June 1, 2014, there will be one day’s coupon accrued. On June 2, 2014, there will be two day’s coupon accrued … On July 9, 2014, there will 39 day’s coupon accrued.
Thirty-Nine day’s accrual at 7.25% p.a. is (39/365) * 7.25% * 25.00 = 0.193664, to six decimal places. The initial dividend was rounded off to five decimal places, so the final dividend looks like it will be $0.193664 per share.
Step 4: Double-Check Everything
This is your money we’re talking about here, so make sure you don’t just understand the calculation, but that you agree with all the reasoning. And, as stated above, you’re best off if you contact Investor Relations and confirm everything with them.
Hello.
I have just start learning up on the fix resets mainly but seeing this article im wondering if there is something missing else there seems to be a valuable trade here.
per the question from assiduous he/she states:
The Company will redeem all outstanding Series 4 Preferred Shares on July 9, 2014 for a cash amount per share equal to the lesser of (i) $25.00 plus any accrued and unpaid dividends and (ii) the Net Asset Value per Unit.
my question: what is the net asset value on this security – where do you find the net asset value? is it different from the published price similar to a CEF (closed end fund – do they have closed end funds on the Canadian markets)?
and assuming ii doesn’t apply.
well the stock is trading at 25.07 and if worth 25.19 on july 9th
well this is just 13 days from now
12 cents assuming you can get hit on the bid for 13 days works out near a 12 to 14% (risk free unless im missing something here) return.
25.19 – 25.07 = 12 cents 365/13*.12/25.07 = 13.44% annualized return – that seems to high for low risk or no risk – whats missing???
lucky to see a 1 to 2.5% return on redemptions in the fix resets after they announce intent to redeem and maybe 2 to 4% once the market assumes there is high chance of redemption?
is there a risk on this name or in these splits that they wont be redeemed after they state that they will be redeem (is the action irrevocable or not – or subject to some contingencies???).
thanks.
reikreik
Im sorry about that.
I read it as June 9th, but its July 9th – so closer to about 44 days still so about 6.5 weeks so about 2 cents a week which is still a bit high???? that’s about a 4% risk free return instead of near 2% – so whats the risk????
certainly not 12 to 14% percent per my mistake but near 4% still sounds very attractive on a risk free basis unless its revocable or unless ii applies which is a nav that is less?
reikreik
well the stock is trading at 25.07 and if worth 25.19 on july 9th
For this term it’s better to use Money-Market Equivalent yield:
P = M / (1 + YD/365)
P = 25.07 [Price]
D = 41 (from the settlement date) [Days]
M = 25.19 (approximately) [Maturity Value]
25.07 = 25.19 / (1 + 41Y/365)
25.07 + 1027.87Y / 365 = 25.19
1027.87 Y / 365 = 0.12
1027.87 Y = 43.8
Y = 4.26%
Holy smokes, that’s a fat yield! However, it should be noted that:
i) We’re ignoring transaction costs
ii) We’re assuming we can buy at the bid
iii) We’re assuming we actually get the money on July 9, which is a bit of a stretch – it will probably be a day or two later
iv) The whole point of Money Market is liquidity and there won’t be much of that in this investment.
is the action irrevocable or not – or subject to some contingencies???
No. If they’ve got the money they have to pay.
my question: what is the net asset value on this security – where do you find the net asset value? is it different from the published price similar to a CEF (closed end fund – do they have closed end funds on the Canadian markets)? …. near 4% still sounds very attractive on a risk free basis unless its revocable or unless ii applies which is a nav that is less?
The Net Asset Value on April 30 was 88.48, so unless BAM.A (the underlying security) completely craps out in the next six weeks, they will have the money. Which, nevertheless, is more risk than is normal for a Money Market investment.
well 4.26% sounds good to me.
thanks for the info and really just saying that this has more appeal then say the other recently redeemed and perhaps this window will close up quickly to get it down to 1.5 to 2.5% range which seems more common.
so the nav is the underlying equity for these – thanks
reikreik
Well one last point?
so 4.25 versus?????
what is the money market yield in Canada? its about zero here.
reikreik
perhaps this window will close up quickly to get it down to 1.5 to 2.5% range which seems more common
Yes, but remember that most recent calls have been of bank issues of far higher credit quality and liquidity than this one. In addition, a lot of investors won’t buy a Split-Share preferred simply on principle.
what is the money market yield in Canada?
Money Market Yields from the Bank of Canada.
okay makes sense.
even today seemed like very light volume so makes good sense.
worth a bet I would suppose but just nothing to big due to this lack of liquidity which makes sense in general at all times for any stock with low liquidity.
reikreik
I should also point out that Canadian taxpayers will get the advantage of preferential tax treatment from the dividends and capital loss on BNA.PR.D, relative to the interest of Money Market.
How would that tax treatment apply in this case? is this for any normal investor? what about professional traders/investors? regular accounts? do you have retirement accounts similar to IRA’s
Would this tax advantage be something that makes the trade that much more appealing???
ry-x lets say even just this year 2014 – 2 dividends of 39.0625 cents so about 78 cents in dividends. the stock started the year at 25.78 and its close today is 25.28 so:
78 cents in dividends
50 cents in capital loss
how high are the taxes on dividends and how much can you save on the capital loss (to the extent of gains only?)?
could this turn the trade into a much better trade then it appears with low rate on dividend and tax savings at higher rate on capital loss???
would anything you tell me apply to all investors (professional or non-professional or both) Presently Im a professional trader in Chicago. I trade prefs, mreits, electric utilities (used to trade small cap banks and insurance and reits with low d/e levels, etc)
presently all traders are usa based but certainly trying to learn more.
thanks reikreik
How would that tax treatment apply in this case?
For the various marginal tax rates, see the Ernst & Young Tax Calculator (linked in the right-hand navigation panel under “Calculators”). The marginal rate for an investor with taxable income of $75,000 in Ontario is:
is this for any normal investor?
Yes, in a taxable account.
what about professional traders/investors?
If you are deemed by the tax people to be a professional investor (e.g., a day trader with no other income) then everything will be considered ordinary income and taxed as interest.
See IT-479R: Transactions in Securities
I once managed a long/short pooled fund that traded Canadian federal bonds exclusively. It traded a lot. Everything was fine for a few years, and then one day our accountants told us that the trading volume relative to the under management had grown so large that they were no longer willing to consider the fund a normal investor.
could this turn the trade into a much better trade then it appears with low rate on dividend and tax savings at higher rate on capital loss???
Yes, but in order to claim a capital loss you must have capital gains to offset; in other words, you can reduce your capital gains tax with a capital loss, but you cannot reduce it below zero and claim against other income.
It also works the other way. If you buy an issue when it trades at a premium, then you will be paying tax on the (higher than normal) dividend income annually, but only claiming the capital loss when it is eventually called. This is bad enough, but if you find you cannot claim the capital loss then things can become really painful.
In the days when there were high-coupon FixedResets trading at high prices (over $27.00), there were numerous examples of the effective tax rate being greater than 100% if you couldn’t claim the loss … and given the panic selling of the Credit Crunch, there will be many people in just that position.
You can claim the loss eventually, however … when you do have a capital gain, or when you die. The latter is what you might call Extreme Tax Avoidance.
I’ve made a calculator for this … Premium FixedReset Tax Effects, linked under “Calculators”
Presently Im a professional trader in Chicago.
I’m uncomfortable enough talking about Canadian taxes! You’ll have to get professional US advice for that.
do you have retirement accounts similar to IRA’s
Yes, there a full bowlful of alphabet soup accounts for tax deferral. Most common is an RRSP, Registered Retirement Savings Plan. Contributions up to the limit are deductible from income; withdrawals are taxable as ordinary income; i.e., you lose the preferential tax rate on dividends and capital gains, but you do defer the tax until the cash is actually withdrawn.
These eventually have to be rolled over into an annuity or RRIF (Registered Retirement Income Fund), and with minimum annual withdrawals that are fully taxed as income.
Looks like the final dividend credited to my account was .19208644. Close enough!
I think what happened is they did the accrual by quarter rather than by year:
There are 92 days from May 31 to August 31.
So the final dividend is:
(39/92) * (25 x 7.25% / 4) = 0.192085598
… with more rounding based on how many pennies your dealer actually got divided by how many shares they actually had.