Brompton Group has announced (critical part bolded):
– (TSX: DGS, DGS.PR.A) Dividend Growth Split Corp. (the “Fund”) announces that the preferred share (the “Preferred Shares”) distribution rate for the next term from September 28, 2024 to August 30, 2029 will be $0.675 per Preferred Share per annum (6.75% on the par value of $10.00) payable quarterly. This represents a pre-tax interest equivalent yield of 8.8% per annum.(1) The Preferred Share distribution rate is based on current market rates for preferred shares with similar terms.
The term extension offers preferred shareholders the opportunity to continue enjoying preferential cash dividends until August 30, 2029. Over the past 10-year period to June 30, 2024, the Preferred Share has delivered a 5.5% per annum return(2). The Preferred Share has delivered consistent returns over various interest rate cycles and has outperformed the S&P/TSX Preferred Share Index over the past 10-year period by 3.2% per annum, with less volatility. (2)
Annual Compound Returns(2) 1-Year 3-Year 5-Year 10-Year Preferred Shares (TSX: DGS.PR.A) 5.6% 5.6% 5.6% 5.5% S&P/TSX Preferred Share Index 20.7% 1.1% 5.6% 2.3% In addition, the Fund intends to maintain the targeted monthly class A share (the “Class A Share”) distribution rate of at least $0.10 per Class A Share.(3) The Class A share has outperformed the S&P/TSX Composite Index (the “Composite Index) and the S&P/TSX Composite High Dividend Index (the “High Dividend Index) over the past 1, 3, 5 and 10-year periods.(2) Over the past 10-year period to June 30, 2024, the Class A Share has delivered a 10.7% per annum return, outperforming the High Dividend Index by 5% per annum and the Composite Index by 3.7% per annum. (2)
Annual Compound Returns(2) 1-Year 3-Year 5-Year 10-Year Class A Shares (TSX: DGS) 27.2% 14.2% 16.1% 10.7% S&P/TSX Composite Index 12.1% 6.0% 9.3% 7.0% S&P/TSX Composite High Dividend Index 6.6% 6.3% 8.7% 5.7% Since inception on December 3, 2007 to June 30, 2024, Class A shareholders have received cash distributions of $16.39 per Class A Share. Class A shareholders have the option to benefit by reinvesting their cash distributions in a distribution reinvestment plan (“DRIP”) which is commission free to participants. Class A shareholders can enroll in the DRIP program by contacting their investment advisor.
The Fund invests, on an approximately equally-weighted basis, in a portfolio consisting primarily of equity securities of Canadian dividend growth companies. In addition, DGS may hold up to 20% of the total assets of the portfolio in global dividend growth companies for diversification and enhanced return potential.
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 September 27, 2024 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 September 27, 2024. Pursuant to this option, the retraction price may be less than the market price if the security is trading at a premium to net asset value. To exercise this retraction right, shareholders must provide notice to their investment dealer by August 30, 2024 at 5:00 p.m. (Toronto time). Alternatively, shareholders may sell their Preferred Shares and/or Class A Shares through their securities dealer for the market price at any time, potentially at a higher price than would be achieved through retraction, or shareholders may take no action and continue to hold their shares.
Thanks to Assiduous Reader RAV4guy for bringing this to my attention!
I don’t have any skin in this game but FWIW I’d be tempted to elect to retract effective September, hope to get my $10 back, and possibly re-purchase at a lower price in the market once the redemption has gone through. DGS is rated P3 ( low) by DBRS, the current downside protection for the pref is only around 36%, and the dividend coverage ratio for the prefs is minimal at some 0.6x. All else equal the grind that’s always been on the NAV of the split’s portfolio will only get worse once they bump up the pref dividend to 6.75%.
Peet, how did you come up with 0.6X div coverage ratio? what would it be if the NAV falls below $15 and the cap shares divs are stopped?
Nestor, I haven’t looked at the financial statements. I read the June 20 2024 press release from DBRS (a log is required):
“Dividend coverage based on the current dividend yield on the portfolio was 0.6x indicating that the current dividend income earned by the Company is not enough to fully cover the Company’s targeted distributions on the Preferred Shares, which increases the reliance on the Manager to generate a high
yield to meet distributions without having to liquidate portfolio securities. ”
Niagara (got your handle right this time, sorry!!!), as to your second question, a dividend stopper on the capital shares would not change the coverage ratio as defined by DBRS. “The dividend coverage available to the preferred shares is calculated by dividing the net dividend income of the portfolio (after deducting issuer expenses and fees) by the fixed preferred share dividend payout … This includes an assumption that the capital shares receive only excess portfolio income.“
Hi Peet, thank you for that. The press release is here:
https://dbrs.morningstar.com/research/434750/morningstar-dbrs-confirms-dividend-growth-split-corps-preferred-shares-at-pfd-3-low
They further state:”Without giving consideration to the capital appreciation potential or any source of income other than the dividends earned by the portfolio, the Preferred Share distributions together with the current distributions on the Class A Shares will create a projected grind on the NAV of the Portfolio of approximately 2.6% per year over the next 5 years. However, the grind in the portfolio is mitigated by a 1.5x NAV test.”
So the grind over the next 5yrs will be a bit higher now.
Something to keep in mind, but I am not too fussed about it. I personally don’t think that we will have a large # of pref shares retracted, given the recent price increases (hence lower yields) in virtually all split prefs….but we will see post-aug 30.
I think the crucial part from the press release is:
For more about credit quality and the implications of low dividend coverage, see Research : SplitShare Credit Quality (PrefLetter Version)
For pref holders, the downside protection (37.2% as of Jul 25) still provides a decent level of comfort in the medium term, barring a major sell off in the underlying securities. The Capital shareholders are the chumps here. They are on the hook for any grind and also for the management expenses since this comes out of NAV. I check the NAV regularly on all of my split share prefs. If it drops too much, I would be out.
James, thanks for the research link.
I found the essay’s point about “sequence of return risk” interesting, ie. that a higher dividend (cash) coverage ratio mitigates the requirement for the manager to sell portfolio stock into a depressed market. AFAIK it’s not something I’ve seen considered by, say, DBRS. I think sequence of return risk for low-coverage splits such as DGSit also qualifies, at least to some extent, the comfort placed on current “downside protection” . In other words, in a downturn the NAV of the underlying portfolio declines materially more than the decline in the portfolio stocks per se.