DGS.PR.A Resets To 5.25%, Unchanged

A full year ago, DGS.PR.A extended term from 2014-11-30 to 2019-11-28, but did not announce a dividend rate for the coming period – this was fine for preferred shareholders since part of the deal was a retraction at par, exercisable for the original maturity date.

Since then, DGS.PR.A has gotten bigger three times – in October 2013, January 2014 and July 2014 – as, clearly, the sponsor is prepared to put some money into marketing a Split Share Corp as long as it has a decent time to run. I haven’t been recommending it, though, pending notification of the new rate.

Brompton Group announced the new rate on September 23:

Dividend Growth Split Corp. (the “Fund”) announced today that the distribution rate for the Preferred Shares for the 5 year term from December 1, 2014 to November 28, 2019 will be $0.525 per annum (5.25% on the original issue price of $10) payable quarterly. This rate is unchanged from the rate for the previous term. The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms. In addition, the Fund intends to maintain the targeted monthly Class A Share distribution at $0.10 per Class A Share.

The Fund previously announced on October 1, 2013 the extension of the term of the Class A Shares and the Preferred Shares to November 28, 2019 from November 30, 2014. The extension allows shareholders to continue to enjoy the benefit of the Funds’ portfolio of common shares of high quality, large capitalization companies, which have among the highest dividend growth rates of those companies included in the S&P/TSX Composite Index. Currently, the portfolio consists of common shares of the following 20 companies:

Great-West Lifeco Inc. The Bank of Nova Scotia AGF Management Limited Shaw Communications Inc.
Industrial Alliance Insurance and Financial Services Inc. Canadian Imperial Bank of Commerce IGM Financial Inc. TELUS Corporation
Manulife Financial Corporation National Bank of Canada Power Corporation of Canada Canadian Utilities Limited
Sun Life Financial Inc. Royal Bank of Canada Manitoba Telecom Services Enbridge Inc.
Bank of Montreal The Toronto-Dominion Bank Rogers Communications Inc. TransCanada Corporation

In connection with the extension, shareholders who do not wish to continue their investment in the Fund, may retract their Preferred Shares or Class A Shares on November 28, 2014 pursuant to a special retraction right and receive a retraction price that is calculated in the same way that such price would be calculated if the Fund were to terminate on November 30, 2014. Notice must be given by November 14, 2014 at 5:00 p.m. (Toronto time) in order to exercise this right.

I received an eMail about this:

I am one of your newsletter subscribers and I purchased DGS.PR.A on your advice last year (thank-you!).

You are probably aware that it is maturing soon with the option to extend for another five years at the same rate (see below). If you had any advice about whether I should bail out or stay in I would be very appreciative.

Also, I have never been in this situation before… do I contact Dividend Growth Split Corp directly or do I contact my stock broker and ask them to inform Dividend Growth Split Corp if I want to retract?

Flattery will get you everywhere! Well, I know nothing of this client’s financial situation or what else he has in his portfolio, but I will say that the reset of 5.25% is very good for holders; if the position made sense for him a year ago, it almost certainly makes sense for him today. Barring unusual portfolio goals and issuer concentration issues, I say hold on to it.

At today’s bid of 10.13, the issue yields 5.05% to maturity 2019-11-28, which is quite good considering that the issue has quite good credit quality, given a NAV of $18.75 as of September 25 to back up each $10 preferred share.

And if you do want to get rid of it, don’t retract! Unless you have very high transaction costs, you’ll get more money selling in the market, given the current bid of $10.13.

DGS.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns; note that these credit concerns relate only to the Probability of Default and completely ignore the prospects for Recovery Given Default – and this latter figure will be quite substantial, particularly when compared with that of Operating Companies, which is expected to be zero.

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