PrefBlog

7 Responses to “January 31, 2019”

1. mr_j936 says:

   February 2, 2019 at 6:07 pm

   New follower of the blog here. I am assuming YTW is yield to worst, the worst case scenario for a preferred… In which case I do not understand how bip.pr.f has a YTW of only 5.92, when at the current price it yields 6.92% dividends (it is up 50 cents, it was yielding more when it was evaluated by the blog) and it is set to reset at either 5 year goc+2.92% or 5.1% which would keep the dividends where they are… I would have imagined the YTW to be above 6.92% as even the worst case call scenario will still yield dividends+a profit given the low price.

   Also, why is this issue so cheap compared to BIP’s other issues? I am struggling to understand this. All of them are very similar, and what little differences they have should not warrant the difference in dividends between one and the other, and there has been major sell offs of this issue that began in November and unlike other issues, it did not recover… Any thoughts on this?

2. jiHymas says:

   February 2, 2019 at 7:52 pm

   New follower of the blog here.

   Welcome!

   I am assuming YTW is yield to worst, the worst case scenario for a preferred…

   Well … worst-case while still meeting their obligations, anyway! That is, when calculating YTW, the scenario chosen is the one in which the issuer selects its options (call or not call) to minimize the holders’ realized yield, while the holder selects his options (if any; put or not put) to maximize the realized yield.

   Bankruptcy or suspension of dividends is not considered an option! Obviously, the very worst thing that can happen is the issuer goes bankrupt the day after you buy it, with no recovery.

   It isn’t perfect … I had a contest a long time ago to highlight one of the logical tricks … but it is a better guide to future returns than many other things.

   In which case I do not understand how bip.pr.f has a YTW of only 5.92, when at the current price it yields 6.92% dividends

   I’m not sure where you are getting the figure 6.92% dividends. The issue currently pays 1.275 p.a.; the bid price on January 31 is 21.76; therefore the Current Yield is 5.86%.

   even the worst case call scenario will still yield dividends+a profit given the low price.

   This makes me suspect that you are assuming a call, or otherwise using an end price of $25.00, in calculating 6.92%.

   The Yield-to-Worst Scenario at present is that it is never called, it remains outstanding forever. There is no reason to believe that a call at 25.00, or a return to a price of 25.00 is at all probable.

   It could happen, of course … but this would be neither the most probable nor the ‘worst-case’ scenario.

   It occurs to me that maybe you are using an on-line calculator (which will generally assume that the end-price is par) or an MS-Excel function with the same assumption. Don’t use these things! They’re not built to evaluate perpetuals that (generally) will change their dividends in a few years. Use the FixedReset Yield Calculator available on this site instead (look in the right-hand navigation panel in the section ‘Calculators’) and review the example at What Is The Yield Of HSE.PR.A?

   Also, why is this issue so cheap compared to BIP’s other issues?

   On a possibly related note … why do you consider it cheap?

   According to me, the YTW is well below that of the other BIP issues, and even after applying fancy-pants Implied Volatility analysis, I still consider it a little rich.

3. mr_j936 says:

   February 2, 2019 at 10:10 pm

   Hi, thank you for the swift response. It appears I was indeed wrong about the dividend number, I was relying on questrade for information, it for some reason is reporting the previous dividend to be 0.3842 which after going back to the prospectus for the share and doing the math turns out it is false. Thank you for taking the time to answer. I should be more careful before I trust that source with dividend info then. The only reason I thought it was cheap was because I thought the yield was higher than it actually is.

4. jiHymas says:

   February 2, 2019 at 11:00 pm

   The first dividend was a ‘long’ one with an extra 18 days in it:

   The initial distribution, if declared, will be payable on December 31, 2018 and will be C$0.3842 per Series 11 Preferred Unit, based on the anticipated closing date of September 12, 2018 (the “Closing Date”). See “Details of the Offering”.

   You have to be careful with recent issues, since the first coupon will almost always be ‘long’ or ‘short’ – that is, cover a period of time longer or shorter than the three months used for all subsequent coupons. Despite this, every on-line reporting service I’ve seen will report a Current Yield assuming that the first coupon was normal.

5. mr_j936 says:

   February 2, 2019 at 11:14 pm

   That is very lazy from these agencies, and potentially dangerous, they calculated the percent yield based on the first div… Anyway thanks again, you saved me from spending money on it lol

6. Prefhound says:

   February 4, 2019 at 1:49 pm

   This is a fascinating insight into why BIP.PR.F and new issues in general might be so overvalued (see discussion on BIP.PR.G new issue a few days ago).
   A long period to the first dividend causes reporting services to generate misleadingly high dividend “yields”. That supports prices by stimulating uninformed buyers such as mr_j936 to buy on the basis of reported yields while informed buyers avoid the issues. Indexers have to buy either way. Over the next year the reporting service misreporting of “yield” gradually disappears and so does the new issue premium to fair value.
   I wonder if issuers are doing this on purpose?

   One seldom sees a short period, although I think one of the recent bank issues may have used it.

7. jiHymas says:

   February 6, 2019 at 1:06 am

   Over the next year the reporting service misreporting of “yield” gradually disappears and so does the new issue premium to fair value.

   Not a full year in most cases, I don’t think. Consider NA.PR.G, which commenced trading 2018-6-11 and paid a long first coupon of 0.5323 on November 15. The second coupon, payable 2019-02-15 is 0.309375.

   TMXMoney shows it with a quarterly dividend of 0.309, price of 22.33 and (Current) Yield of 5.542%, which is all correct as far as it goes.

   I believe the reporting services all use the most recent dividend only, because for equities they’re supposed to be monotonically non-decreasing.

   Long first coupons have the virtues of decreasing paperwork and leaving cash in the hands of the issuers for longer.