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31 Responses to “August 9, 2019”

1. jimmy says:

   August 10, 2019 at 2:15 pm

   Hi,

   I think I understand the recent price moves a little more based on a simple dividend pricing model. Let’s look back to when the GOV5yr was 2%.

   So we have a 5 yr fixed reset PS = 25, Premium 3% GOC 5 yr 2%, yield = 5% div = $1.25.

   Now say the GOC 5 yr falls to 1% ( for ease) . So the new yield is 3% + 1% = 4%, div on reset = 4% x $25 = $1.

   Investors then are unhappy w this 4% and begin to dump their shares until the price falls to yield 5% again. ie PS goes to $20.

   It is not that complicated a model (but likely too simplistic) . The div fell 20% so the price fell 20% accordingly. It worked the other way around in 2016 when the 5yr rate rose from .5% to 2%. I think PS became fully priced when they rose back assuming the GOC5yr was staying at 2%.

   The question is is the 5yr at the bottom yet?

2. paradon says:

   August 10, 2019 at 8:15 pm

   I understand your logic but you could also argue that if the 5yr falls to 1% then an investment that pays you 4% is still paying you the same premium.

3. jimmy says:

   August 10, 2019 at 10:45 pm

   Yes. Good pt. But investors sold their PS so maybe they were looking for more total return and went to equities possibly.

   Or the new issues might have a higher premium say 4% to yield (+ 1% GOV 5yr ) 5% total. This is an area I’m not too familiar w.

   Both could explain the selling and price drop.

4. CanSiamCyp says:

   August 12, 2019 at 11:40 am

   Hi Jimmy!

   The relationship is not so straightforward as noted in the following excerpt from the TDDI June 2019 monthly pref report:

   “It’s worth noting that the five-year benchmark declined 16 basis points from five years ago, which has resulted in issues resetting last month at a dividend rate that is 3.4% lower than the previous dividend. However, the prices of those issues have declined an average of 33% over the same period.”

   The analyst misused the expression ‘dividend rate’ when I am sure that he meant annual dividend. In essence, he is saying that the annual dividend income generated by prefs renewing in June 2019 was 3.4% lower than the year before while the market price of the same prefs declined by 33% from June 2018.

   So market price drops are triggered by but are definitely not linearly related to the declining annual dividend level.

5. jimmy says:

   August 12, 2019 at 2:23 pm

   Hi CanSiamCyp,

   Thanks. Good pt when compared to issues from 5 yrs ago resetting.It does seem like an overreaction for some issues

   I can understand issues from a year ago when the 5 yr was at 2.48% being hit hard if the assumption is the 5 yr will remain at 1.37% in 5 yrs time when they reset too.

   My ETF HPR likely has a mix of all these issues and just hope it recovers a little over the next 5 or so years.

6. jiHymas says:

   August 13, 2019 at 2:07 pm

   I think I understand the recent price moves a little more based on a simple dividend pricing model.

   It’s a very good first step and I think that’s what a lot of people are doing. But let’s look at some actual numbers:

   July 5
   FixedReset Discount Index: 2,147.5
   FixedReset Discount Yield: 5.22 %
   GOC-5 Yield: 1.53%

   August 12
   FixedReset Discount Index: 2,029.2
   FixedReset Discount Yield: 5.42 %
   GOC-5 Yield: 1.20%

   Changes:
   Total Return of index: -5.51%
   Change in index yield: +20bp
   Change in GOC-5 Yield: -33bp

   So, to a first approximation, we can say that the Effective Modified Duration of the index relative to GOC-5 is -(-5.51%/-0.20) = – 27.6, which is ferocious and probably is an outlier if I were to repeat this calculation over all the data I have … which I will do … some day.

   Usually, what I have observed – as you can sort of see, qualitatively, in the second chart in this post, is that a decline in GOC-5 yields will be transmitted fractionally to FixedReset yields; that is, something like a 33bp decline in GOC-5 should result in, say, a 20bp decline in FixedReset Yields. The other 13bp of the GOC-5 decline will then be absorbed by a price decline in FixedResets.

   There are further elaborations. Say the average price of instruments in the FixedReset Discount index is $20. However, dividends are paid based on par, $25. Therefore, a 4bp change in GOC-5 will have a 5bp effect on FixedResets, divided somehow between price effect and yield effect.

   I understand your logic but you could also argue that if the 5yr falls to 1% then an investment that pays you 4% is still paying you the same premium.

   There was a discussion about this on the March 15 post.

   I quite agree that people should be looking at spreads. And they will! Eventually! But not, I think, until the market has some positive momentum and people – and their advisors – don’t think of preferreds as ‘things that always go down’.

   In the meantime, I will continue to bleat ‘where are the GIC refugees?‘

   The relationship is not so straightforward as noted in the following excerpt from the TDDI June 2019 monthly pref report:

   I have no doubt that the data quoted is accurate – if there’s one think that sell-side analysis excel at, it’s Excel – but starting the analysis prior to December 2014 is a little … convenient.

   As I have said many times in this blog and in PrefLetter – for instance, here –

   So why is this happening? I believe that a sudden realization that low Canada yields would be reflected in dividends of FixedResets, that started with the reset of TRP.PR.A announced in early December, 2014, turned into unreasonable fear in the spring of 2015 and escalated into blind panic.

   The reset of TRP.PR.A from 4.60% to 3.266% was a major turning point in the market. It was the first widely held blue-chip issue to reset at a significantly lower rate and the market was taken completely by surprise – despite the fact that the change had been totally forseeable for a long, long time.

   Until then, relative pricing of FixedResets had been determined by their Current Dividend. Over the next few months, there was a gradual change to a more rational pricing model based on Issue Reset Spread.

7. jimmy says:

   August 13, 2019 at 3:12 pm

   Thanks James for the time to explain and that really helps. That 2nd graph is very illuminating. It show a real overreaction in terms of price decline.

   The rolling returns graph is also useful and a little more reassuring.

   I want to add more HPR but will see if there is another BOC rate cut or just monitor the 5 yr rate for the next yr maybe. Put it this way HPR was at 7.45 when the 5 yr was .5% and it is at 7.90 now. So it could fall another 5% but the upside over the LT makes the risk acceptable.

8. mbarbon says:

   August 14, 2019 at 8:51 pm

   I don’t think we will get GIC refugees until the price of these shares stabilize.

9. RAV4guy says:

   August 16, 2019 at 2:33 pm

   Paradon says
   “I understand your logic but you could also argue that if the 5yr falls to 1% then an investment that pays you 4% is still paying you the same premium.”

   I am new to the blog, having followed for years. I am a preferred share investor but I have lost my faith that rate reset preferred shares (RRPS) are a sensible investment. I am not selling what I own, but I could not tell a friend in good conscience that a discount RRPS is a good investment. Paradon’s comment above prompted me to join the blog.

   Several years ago an investment adviser explained to me the rate reset feature was there to help keep the preferred share price from fluctuating like perpetuals fluctuate. I believed this then and I still think it is true. However, the market is behaving differently and I do not understand why.

   My thesis which was inspired by the comment above is that if interest rates fall then owners of RRPS should be comfortable with having a lower YTW. But many owners of RRPS are selling and causing much lower prices for many discount RRPS. I offer the following data:

   		BAM.PF.A		TRP.PR.G
   	GOC5	YTW	Bid	YTW	Bid
   Jan.11/19	1.91%	5.24%	23.15	5.60%	21.40
   Aug.9/19	1.23%	6.12%	18.07	6.18%	17.11

   I chose the two discount RRPS above at random and they were the only ones I looked at. I realize that YTW should best be compared with long term bond yields but I do not have that data.

   The GOC5 is down 68basis points whereas the YTW for BAM.PR.F is up 88bp and the YTW for TRP.PR.G is up 58bp. If the YTW had been allowed to fall the current prices would be closer to the starting price and I would feel better. I am not selling and I am happy to collect the dividends in the short term but I need an explanation, a pep talk and a hug.

   Table formatting applied by JH as per request below

10. RAV4guy says:

    August 16, 2019 at 2:36 pm

    The little chart I prepred does not look the same as I typed it and I hope James can fix that.

11. baffled says:

    August 17, 2019 at 7:41 am

    cant give you a pep talk or a hug , nobody wants the rate resets , because there is no floor to how low the gov of canada rate can go , and dont be surprised if it goes negative , so there is great uncertainty as what your future return will be . investors hate uncertainty .

12. skeptical says:

    August 17, 2019 at 9:21 pm

    Good point baffled. Mr. Greenspan was quoted a few days ago saying that zero is just another number. Of course, he was referring to the zero interest rate on the number line. For economists that have little experience in the real world of business or finance, they can model rates to whatever numbers they want. In their econometric equations, they use lots of calculus, along with imaginary numbers. So, when they say they need negative yields to achieve their objectives, they actually mean it. And with an overzealous political leader like Mr. Trump, it would be a match made in heaven. Experimental economists and expedient/wily politicians.
    I used to have some faith in my abilities to analyze rate resets assuming a base rate of zero. But the way things are now and how they could be, rate resets have a huge tail risk(not sure if we can even call this now) of rates dropping below zero.
    If that happens, just imagine the devastation it would unleash on the rate reset market.

    Nine years ago, Bay Street sold a pack of lies to Canadian investors- buy the rate resets as they mitigate the interest rate risk.
    Since nobody can really predict rates with any degree of certainty, why have such complex product for simple investors? I’m sure nobody will be asking these questions.

13. skeptical says:

    August 17, 2019 at 9:29 pm

    Just to add further to the weird pricing behavior of the rate resets. I think most people really want a steady stream of dividend income with minimal risk and some semblance of price stability. $25 issue dropping to $15 or even $10 make no sense. In the old world, interest rates would have had to more than double- imagine a world in which perpetuals yield 10 to 12%….That’s the kind of fall these rate-resets have taken.
    Many years ago James wrote a beautiful article on the stability of income vs stability of principal. I think for most people-the primary market of these preferred shares-a steady dividend is what’s needed. With some price fluctuation.
    Just look at some of the buyers of preferred ETFs these days- these are people trying to hedge their interest rate exposure. Very sophisticated finance types who know what they are doing.

14. baffled says:

    August 18, 2019 at 7:40 am

    skeptical ……”stability of income vs stability of principal. ” thats the question , everyone that buys preferred or indeed any income producing product has to answer that question . if you cant live with income or principal fluctuation then its only a gic . for my self , i want income stability and buy the pref and other div paying stocks knowing that what i pay may never be seen again (up or down ) thats why i never touch rate resets . with all the possible reasons for div cuts on the perpetuals both company specific and gov tax policy , why add in the additional hazard of int. rate fluctuations at a time when we have , never before seen in history int rates .

15. Tim says:

    August 18, 2019 at 10:46 am

    Here is a link to the referenced whitepaper that James wrote:

    Security of Income vs. Security of Principal
    April 2012
    http://www.himivest.com/media/SecurityIncome.pdf

    I in the process of getting some current quotes for purchasing Canadian joint life annuities. I’m interesting in looking if/how it makes sense to use preferred shares as an annuity-like income-generation instrument. Clearly preservation of capital is not the strong suit of preferred shares!

16. skeptical says:

    August 18, 2019 at 11:11 am

    Yes Tim, that was the link. Thanks.
    I have thought about the preferreds vs annuities for a long time.
    Look at it this way- lots of companies issuing annuities in Canada are the same that issue preferred shares. Also, I doubt that there are very many annuity products that offer anywhere close to 6% return on a tax advantageous basis.
    Someone has to do this, but I’m certain that if someone made an ETF of perpetuals in Canada, it would show a return of at least 5 to 6% over the last 10 years or so. Much better returns over longer time horizons.
    I consider most of these dips in perpetuals as buying opportunities. The only thing that concerns me is the credit quality of the issuer and some tax changes.
    For tax changes, should any government screw up the dividend tax credits etc, it would destroy Canadian capital markets. There’s no real reason to keep on investing in Canada should these advantages be taken away. The Rest of the world is much more enticing!

17. jiHymas says:

    August 18, 2019 at 5:19 pm

    I don’t think we will get GIC refugees until the price of these shares stabilize.

    I agree that hoping ultra-risk-averse GIC investors will shift en masse to a free-falling market is an exercise in futility. But, eventually, the day will come.

    The GOC5 is down 68basis points whereas the YTW for BAM.PR.F is up 88bp and the YTW for TRP.PR.G is up 58bp. If the YTW had been allowed to fall the current prices would be closer to the starting price and I would feel better. I am not selling and I am happy to collect the dividends in the short term but I need an explanation, a pep talk and a hug.

    In the absence of special factors – credit worries or tax changes, for instance, one can make a good argument (spreads) that the YTW for preferred shares should go down by the same amount that the YTW for GOC-5 goes down.

    It can also be argued – less well, I think – that the YTW of preferred shares should go down by some fraction of the decline in GOC-5 yields, or not go down at all.

    But the fact that the YTW of preferred shares has actually gone up in the face of a declining GOC-5 yield really illustrates the panic-stricken nature of this downturn. Clearly, there are many people extrapolating GOC-5 declines to the end of the world, while others are simply selling because prices have gone down (which is the worst reason to sell that exists!).

    The preferred share market is dominated by retail investors due to their tax advantages. Tax advantages are of little interest to institutional investors as a class, because most institutional investors are pension funds and charitable foundations and therefore don’t pay tax anyway. In addition, those institutions that might have an interest are often managed by very lazy people – they don’t want to work a trade all day and get, maybe, $100,000 worth of stock. They want to trade $20-million+ with a single ‘phone call, so they can get back to wisely repeating headlines from the Wall Street Journal to each other and pompously dissecting the details of the Trump-Powell relationship – anything, as long as it doesn’t involve actual work!

    Anyway, it’s a retail market; prone to panic and with very little contrarian money waiting to be put to work. Thus market moves, when they occur, tend to be grossly exaggerated.

    This is not entirely a bad thing. The volatility keeps a lot of players away; some for good reasons, such as a fair chance of having to liquidate the portfolio at a bad time as the money might be needed for other purposes; others for bad reasons, such as the use (and, very often, misuse!) of the Sharpe Ratio.

    The important thing is to maintain a focus on the reason why you bought your position in the first place:

    I am happy to collect the dividends in the short term

    … though I must say, the “short term” (0-5 years) is a pretty tight schedule. Better is the medium term (5-10 years) and best of all is the long-term (10+ years).

    As I wrote in the dark days of the Credit Crunch: Shut up and clip your coupons!.

18. jiHymas says:

    August 18, 2019 at 5:37 pm

    nobody wants the rate resets , because there is no floor to how low the gov of canada rate can go , and dont be surprised if it goes negative , so there is great uncertainty as what your future return will be .

    That’s not really a good reason.

    If rates do go negative, they almost certainly won’t go very negative: the five-year Bund currently yields -0.92% … which is shocking, but when people get into a tizzy about negative yields I always get the feeling they’re talking about points and points of negativity, not beeps.

    So say we’ve got a mildly negative GOC-5 yield. Call it -0.50%, so a FixedReset with an Issue Reset Spread of 250bp is paying 2.00%. I think that’s a pretty good deal!

    investors hate uncertainty .

    In theory, sure, but I think what they really dislike is capital losses, whether these are realized or unrealized. What is happening, I think, is that many people are crystallizing moderate capital losses at the moment because they are terrified of larger capital losses, without any portfolio considerations.

    Another problem is the Canadian bank hegemony. There have been persistent reports of people using bank equities as fixed income substitutes. One day – perhaps not in my lifetime, but one day – Canadians will learn that banking really is a risky business.

19. jiHymas says:

    August 18, 2019 at 5:52 pm

    Nine years ago, Bay Street sold a pack of lies to Canadian investors- buy the rate resets as they mitigate the interest rate risk.

    What wasn’t emphasized was that there is still credit risk and spread risk in these things; but I will assert that yes, they do mitigate interest rate risk.

    The current problem is mainly that mitigating interest rate risk is not the same thing as mitigating market fears of interest rate risk.

    Since nobody can really predict rates with any degree of certainty, why have such complex product for simple investors?

    Rate prediction is vital to virtually everybody who buys a house, and we’re OK with that … even when a lot of people lost their houses – and businesses – when rates jacked up in the early ’80’s. Nobody objects to mortgages.

    I confess that I get a little annoyed when I see preferred shares referred to as complex instruments, which happens quite a lot.

    ‘Preferred shares can be called! This is very complex!’

    ‘Preferred shares can sometimes have their dividend rate reduced! This is very complex!’

    How can you possibly call something complex when it is spelled out right in the prospectus? That’s not complexity, that’s more along the lines of ‘looking things up’!

    What I call complex is equities. Holy smokes, when you analyze an equity you’ve got to account for future demand for the product, technological change, tariffs, foreign exchange rates, competition … the list just goes on and on, and you’re not even finished yet! You have to estimate the effects of all these things on a very big revenue number and on a very big expenses number, and then, finally, subtract one from the other because the very tiny difference between these huge numbers is your profit.

    That’s complex!

    You have to do a bit of that when assessing credit quality of fixed income instruments, sure, but the effects are muted. Complexity of preferred share instruments? It’s just a bit of math; and high school math at that. Easy.

20. baffled says:

    August 18, 2019 at 8:19 pm

    hello james , you say ” If rates do go negative, they almost certainly won’t go very negative:” it is early days for negative rates , and most things over shoot and stay crazy for longer than you would think is possible . i still think the negative rates are keeping people away from the rate resets .

21. skeptical says:

    August 18, 2019 at 9:23 pm

    https://www.news.com.au/finance/economy/interest-rates/were-almost-out-of-ammo-reserve-bank-considering-extreme-measures-to-save-economy/news-story/cf5a1247f66ea014db045e815b67f89f

    Australia is closest to Canada in terms of immigration and resource based economic structure.

    Australia talking about QE already. What happens if they cut rates to zero and nothing happens? Well, they will cut even more…and more.

22. jiHymas says:

    August 20, 2019 at 11:24 pm

    I think most people really want a steady stream of dividend income with minimal risk and some semblance of price stability.

    Sure, as long as the dividend income is going to be far higher than what one could reasonably expect from an investment with ‘minimal risk’.

    Preferred shares go through happy periods when the risk is thought to be minimal. There was the period immediately before the Credit Crunch, when investors looked at the returns since the last thumping in the early ’90’s and decided Straight Perpetuals fit the bill. So there was mass issuance, followed by a discovery that the risk wasn’t minimal.

    Then people decided that it was the fixed nature of Straight Perpetual dividends that carried all the risk, so issuers gave them FixedResets (taking advantage of the opportunity to shrink the lock-out period before the first par call). Market demand was incredibly strong and lots of issuers that had no business being in the market jumped on the opportunity; now we continue to suffer through an over-reaction to that.

    if you cant live with income or principal fluctuation then its only a gic .

    I’ve noticed a lot of people get very upset when told that a five-year GIC has the same price risk as a five-year Canada; they insist that because it’s not reported and because the instruments often cannot be sold, there is no price risk at all.

    why add in the additional hazard of int. rate fluctuations

    Interest rates can also go up!

    Here is a link to the referenced whitepaper that James wrote:

    Thank you!

    I’m interesting in looking if/how it makes sense to use preferred shares as an annuity-like income-generation instrument.

    It makes all kinds of sense, if you’re sufficiently well off that you don’t need the mortality credits that you get with annuities. I wrote about this in the April, 2010, and April, 2011, editions of PrefLetter.

    Also, I doubt that there are very many annuity products that offer anywhere close to 6% return on a tax advantageous basis.

    The Mortality Credits that are part of the payments are not taxable – they’re a return of capital, so are not taxed. You’re only taxed on the portion of the payments that are due to investment income.

    However, my analysis referred to above led me to conclude that annuities are lousy investments – although they are wonderful insurance! From the April, 2010, PrefLetter:

    In Table 5, we begin with a pool of 60,102 male annuitants, all aged 75, who pay $100,000 each for annuities paying $904.35 monthly. The insurance company receives total premia of just over $6-billion. At the end of the first year, 57,522 annuitants are still living, so the company pays out a little over $624-million and the process continues until the last survivor dies after having received thirty-five years of payments.

    We can make two observations from Table 5: first, the total dollars paid out is only slightly larger than the number of dollars paid in (the difference is less than $356-million, about 6% more than the insurer received in premia). Secondly, and related to the first observation, the insurer only has to realize a rate of return of 0.80% in order to break even.

    I then go on to discuss how this should not be taken to mean that the process was completely risk-free for the insurer, because they’ve got to worry about adverse selection risk, among other things.

    Note that if you buy at, say, 75 and defy the mortality tables by living to be 100, your IRR on your investment will be very nice indeed.

    it is early days for negative rates , and most things over shoot and stay crazy for longer than you would think is possible

    Australia talking about QE already. What happens if they cut rates to zero and nothing happens? Well, they will cut even more…and more.

    Oh, I’m not saying that negative rates could not possibly come to Canada. Nor am I saying that yields could not possibly get into the ‘points and points’ range, although it would be interesting to work out just what might happen if they did. For instance, will anybody – anybody at all – buy a GIC with a negative yield? I rather think Joe Retail’s going to keep the money in cash, or possibly buy commodities (in the same way as Indians buy gold, for instance). However, as has been noted elsewhere:

    In Germany, where government bond yields are negative, mortgage rates are low but still above zero – so would assume that German lenders have something analogous to a GIC with a positive interest rate.

    I do not claim great familiarity with the German market, so feel free to correct me – but I believe that German banks generally finance mortgages with Pfandbriefe, which are covered bonds:

    the Pfandbrief sector is comfortably the largest fixed-income instrument in Germany, accounting for just under 35% of the Deutschmark bond market at the end of 1995. Federal government bonds, by contrast, account for just under 28% of the market.

    … and with respect to pricing:

    On June 26, German lender Landesbank Hessen-Thüringen Girozentrale (Helaba) sold the first negative yielding covered bond since a Berlin Hyp issue in 2017. The five-year mortgage pfandbriefe, due July 2024, carried a 0% coupon and a reoffer yield of minus 22.7bp. This comes as just 15% of the stock of outstanding pfandbriefe currently trades with a positive yield.

    Cheap funding might encourage banks to do more real estate and mortgage lending. That doesn’t always end so well.

23. baffled says:

    August 21, 2019 at 6:33 am

    your comment about the 5 year gic and the 5 year canada bond does compare apples to apples in that there is the expectation that the princ. will be returned on maturity (what that will buy is another topic) , but comparing the 5 year gic or canada bond to the preferred is apples to oranges . people buy the 5 years gic/bond because they know they will get their money back , and they know what the income each year will be . the no maturity or certainty of getting back the princ. paid for the preferred is the main reason people wont buy them . and in the case of the rate resets , the variability of income is another reason .

24. baffled says:

    August 21, 2019 at 6:35 am

    ” That doesn’t always end so well.” very true , but i think you can say this whole negative rate adventure the central banks have us on wont end well for all of us .

25. jiHymas says:

    August 21, 2019 at 2:59 pm

    comparing the 5 year gic or canada bond to the preferred is apples to oranges

    It’s all fixed income investing, which means it’s all about trade-offs, the main one being Security of Income vs. Security of Principal.

    My point is that a package of FixedResets has the same uncertainty of income as a five-year GIC ladder, albeit at a much higher level. The FixedResets will have a great uncertainty regarding principal, which is what the higher level of income is compensating.

    So, if it is rational to sell when the resets start dropping, then all the plans out there regarding GIC ladders are incomplete: RBC merely states:

    If interest rates fall, other portions of your portfolio still benefit from the original (higher) rates that were in place when you made the initial investment.

    Moneysense doesn’t even go that far:

    Or maybe rates are really good right now, but you’re worried that in five years when your GIC matures you’ll be stuck renewing at some pathetic interest rate.

    Eliminate the stress. Lose the guess work. Ladder your GICs.

26. skeptical says:

    August 21, 2019 at 5:37 pm

    The best thing about falling rates in the context of preferred shares- It makes the balance sheet stronger for a lot of companies! All the issuers of floating rate and fixed rate resets rejoice! If you happen to own one of the few perpetuals or common equity of these issuers, it would be a great blessing.

    IMHO, if what the bond market is saying is correct and the negative yields do visit Canada in the next year or two, these perpetuals from top issuers will become a wonderful asset class to hold.

27. baffled says:

    August 21, 2019 at 6:33 pm

    skeptical , for banks , insurance companies , and other industries the zero and maybe negative rates makes it harder for them to generate profits and cash flow . div payout coverage may go very high with reduced profits and cash flow , divs may have to be cut . i am not so sure that falling rates would be a great blessing . the central banks are screwing with the time value of money , i dont think it will end well for any body .

28. baffled says:

    August 21, 2019 at 6:38 pm

    oops , should have said , div payout .. ratio… may go very high

29. skeptical says:

    August 21, 2019 at 6:42 pm

    It was more tongue in cheek remark, baffled.

    I get what you are saying.
    It might be true for the banks/insurance cos, but definitely not for the likes of BAM, utilities and pipelines. Cheaper funding means more profit to them, disregarding other factors.

    I think for some weird reason, the preferred shareholders try to carry the burden of the whole world on their shoulders.
    Dividend cuts, deep recession etc. are nowhere on the lips of the common shareholders.
    And preferred dividends as a percentage of total dividends is a very small fraction for a majority of blue chips that readers of this blog typically own.
    That’s the main reason for credit analysis that James stresses all the time!

    The most recent dividend cut that I recall was for Husky common shares during the 2015/16 oil price bust. And even they didn’t touch the preferred dividends.

30. skeptical says:

    August 21, 2019 at 11:14 pm

    I don’t know how many people are following the crisis in California’s biggest utility PG&E.
    Both the bond and stocks for this utility have taken major hit because of the possible liabilities resulting from wild fires. The common stock has fallen from nearly $60 to low teens today.
    How are the preferreds doing?
    Great. Wonderful. Still trading at a premium for a 6% yield.
    I shudder to think what would a scenario like that do in Canada. Imagine a big utility’s stock getting pounded by 80%. It’s common would most certainly not trade as if it’s business as usual.

    Here’s a proposal by PG&E on some changes to the capital structure.

    https://www.pge.com/pge_global/common/pdfs/your-account/your-bill/understand-your-bill/bill-inserts/2019/05-19-Cost-of-Capital.pdf

    Bottom line: Preferred holders in the US market appear to be a lot smarter than their counterparts in our country. As a result, perfectly good to great product here gets trashed in bouts of panic selling that inflict our markets every other year or so.

31. jiHymas says:

    August 22, 2019 at 2:17 am

    Preferred holders in the US market appear to be a lot smarter than their counterparts in our country.

    There’s no Dividend-Tax-Credit-And-Gross-Up in the States, which means that non-taxable entities are not hindered from entering the market, so they do. This brings a big increment of sophistication to pricing.