Preferreds

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Thegipper
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Re: Preferreds

Post by Thegipper » 22 Feb 2016 12:17

SQRT wrote:
Thegipper wrote:
SQRT wrote: I agree with you except the common is yielding almost as much. Why not try to participate in the upside? The prefs really are not as risk free as they might seem given the NVCC structure. I don't view the chances of a common div cut as being significant, but if they had to cut the common divs the prefs would very likely trade down as well given the NVCC provisions. So on a risk adjusted basis, I see the common as a better bet.
I have given some thought to the NVCC provisions. If I understand it correctly the regulator can force a conversion to common shares if the bank has serious capital shortfalls. Although this may be possible I think the risk is remote. I bought a chunk of RY.PR.Q. I get a 5.4% yield until 2021 and on the reset I should get a 5% plus yield. Even if the government yield is zero on the reset date I still get 4.75%. The daily trading volume is much larger on this preferred share then on other preferred shares. It is much more liquid stock.
I don't dispute your logic. But when RY common yields 4.4% and the div grows every year (probably5-8% per year) it just seems like a better bet to me. Prefs are not FI especially with the NVCC which ties them more closely to the common results on the downside.
I understand the logic of holding the common shares. Here is my take. We will have a long period of low interest rates, low inflation and very low growth. Canadian banks will have trouble growing in that environment and if correct the common shares will be under pressure. The NVCC preferred shares should trade close to the $25 dollar price and be paying close to 5.5% . I expect they will behave more like a fixed income asset then a common share. Mr Market will have the final say.

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AltaRed
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Re: Preferreds

Post by AltaRed » 22 Feb 2016 12:52

Gipper does have a point. For risk averse seniors for which capital preservation is key, they get a dividend as good as the common without much capital risk. I don't see the Cdn banks having much in the way of growth going forward for the foreseeable future, so while most of us are comfortable enough with the risk of capital losses associated with the commons with the likelihood of some dividend growth and capital appreciation, there is a place for the new prefs with yield floors.
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milton
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Re: Preferreds

Post by milton » 22 Feb 2016 18:39

like_to_retire wrote:
adrian2 wrote:Blood has been pouring on the streets of PrefVille, I'm on the buy side!
I have been buying too only to the extent of shoring up my percentage allocation of rate resets versus perpetuals, but like Scomac I am losing my enthusiasm. I get the feeling I am throwing money into a bottomless pit.

ltr
You and me both! Even if all the dividends from everything in the non-reg portfolio for the entire 2016 year were to be reinvested into the pref portion, it would still be below its asset allocation (30% prefs, 20% reits, 40% zcn, 10% small caps)...

Having said that, that.s still the game plan. Last couple of months been buying aim.pr.a, hse.pr.a, bbd.pr.c, mfc.pr.j, and ifc.pr.a.

Last time there was such a black hole in the portfolio was the reits in 2007-2009. Mindlessly rebalancing during that period worked out well. Surprisingly, today it is the reit portion of the portfolio that is providing the ballast.

Who knows what will happen, but maybe in the future looking back, it will seem like 2015-2016 will have been good time to have been buying prefs?

Look at mfc.pr.j. Investment grade. Possible forced redemption from Basel. If it resets at today.s rates (2.61% + 0.6%) and price ($16.70) in 2018 it would yield 4.8%. What a monster yield! Their new issues are yielding even more, 5.6% or so!!! Compare that with manulife bond issued in 2014 maturing 2019: offer yield is 2.45% on TD bond desk.

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SoninlawofGus
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Re: Preferreds

Post by SoninlawofGus » 22 Feb 2016 19:17

milton wrote:Who knows what will happen, but maybe in the future looking back, it will seem like 2015-2016 will have been good time to have been buying prefs?
Yep, those suckers will probably turn around when we see
-- a collapse in the Vancouver and Toronto housing markets
-- a reverse in interest rate yields
-- an end to the 30-year or so bull market in long bonds
-- the demise of the US dollar (to be replaced by the yuan)
-- a collapse of the American "zombie" banking system
-- a takeover of the global currency system by bitcoin
-- a true bull market in Japanese stocks
-- gold as money again

No small number of people have been predicting some or all of those inevitabilities. I'm not sure who the "greater fool" theory really applies to anymore (except that it always applies to me). :roll:

Full disclosure: I'm not selling my rate resets.

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Re: Preferreds

Post by SQRT » 23 Feb 2016 10:29

AltaRed wrote:Gipper does have a point. For risk averse seniors for which capital preservation is key, they get a dividend as good as the common without much capital risk. I don't see the Cdn banks having much in the way of growth going forward for the foreseeable future, so while most of us are comfortable enough with the risk of capital losses associated with the commons with the likelihood of some dividend growth and capital appreciation, there is a place for the new prefs with yield floors.
If only we could see the future. I am less pessimistic in the view for bank common shares. They always seem to do better than the pessimists think. I would think divs growing at 5% with total returns in the 5-7% is a very safe bet. Heck, inflation alone should boost their results by 2% Per year. They have many levers to help increase earnings. But who knows.

I am not familiar with the terms of the new rate resets, but wouldn't the banks call them in if they could refinance at a lower rate at or after the reset dates. If so doesn't that cap the rate you will receive? At least that's the way we used to do it in the "old days".
Last edited by SQRT on 23 Feb 2016 12:51, edited 1 time in total.

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AltaRed
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Re: Preferreds

Post by AltaRed » 23 Feb 2016 12:46

Yes, the new resets will likely be called in 5 years, particularly if the GoC5 rate goes up 150-200 bp or more. In the meantime though, that fixed income senior gets a 5.25% qualified dividend yield. Pretty good for a pseudo 5 yr GIIC. I won't be buying these things but I can see the attractiveness of them to a senior and how the advisors are pushing them to their retail clients.

I don't know what the future holds for Cdn bank commons but while I agree they have lots of ways to pull levers to at least match, if not beat, Cdn GDP growth, that is not saying much. There is no political leadership anywhere in this country that is not simply catering to 'don't worry, be happy' feelings. Tax and spend is the mantra and that will do nothing for a nation almost completely dependent on global trade.
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jay
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Re: Preferreds

Post by jay » 23 Feb 2016 15:31

milton wrote:[Look at mfc.pr.j. Investment grade. Possible forced redemption from Basel. If it resets at today.s rates (2.61% + 0.6%) and price ($16.70) in 2018 it would yield 4.8%. What a monster yield! Their new issues are yielding even more, 5.6% or so!!! Compare that with manulife bond issued in 2014 maturing 2019: offer yield is 2.45% on TD bond desk.
Milton, just a heads up: MFC.PR.G provides a better YTW than MFC.PR.J

BRIAN5000
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Re: Preferreds

Post by BRIAN5000 » 23 Feb 2016 20:18

KYC form is filled out as conservative and your advisor sells you 90% rate reset preferred shares for your whole portfolio. That's all the info I have for now what say some of you?

IMHO this was incorrect but depending on what as said or asked for wouldn't necessary result in any recovery due to advisor "error", "mistake" etc..
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Re: Preferreds

Post by Thegipper » 24 Feb 2016 10:09

RY is down close to 5% today. The reason is simple revenue and profits declined. Given the problems in the Canadian economy it's going to be hard to find growth for the banks. I note that the new RY NVCC reset is up almost 2%.

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Re: Preferreds

Post by SQRT » 24 Feb 2016 11:57

Thegipper wrote:RY is down close to 5% today. The reason is simple revenue and profits declined. Given the problems in the Canadian economy it's going to be hard to find growth for the banks. I note that the new RY NVCC reset is up almost 2%.
Yes, maybe switch from the pref to the common? Yields almost the same with the div increase on common.

jay
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Re: Preferreds

Post by jay » 02 Mar 2016 16:00

Good breadth these last couple of days. Today, 90% of the issues in the fixed reset index are up. Dare I say we put in a short term bottom?

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Re: Preferreds

Post by jay » 07 Mar 2016 10:58

Seems to have caught a bid with decent volume today. I track all fixed resets and breadth remains high (>80% up this morning). Current weighted average YTW on fixed resets is just above +5% (based on my own calculations), and it lines up with prefblog's median YTW calculation. IMO, YTW can easily fall to 4.5% (all things equal) and the index would remain within fair value. My short term target for ZPR is thus another +10% from here which puts it between $10 and $10.5.

Over the last several months I have backed the truck on ZPR and individual names with high YTW (AIM.PR.A, HSE.PR.A, CF.PR.C, CPX.PR.C) and getting close to break-even overall. I am hoping to use this move if it continues to sell some.

@AltaRed, I remember you mentioned you were waiting for the preferred market to turn before you step back in. What are you thoughts these days?

EDIT: correct bad spelling

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AltaRed
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Re: Preferreds

Post by AltaRed » 07 Mar 2016 11:05

Not doing anything at the moment, and not likely to do so for some months at least. That is because I have, IMO, a full allocation to prefs and I would only be doing swaps to: a) increase weighting in insurance deemed retractibles, and/or b) crystallize some losses to offset gains in 2016 for tax loss selling purposes.

FWIW, I used to precisely look for arbitrage opportunities, to the point of a few tenths of a point in YTW. I don't sweat that kind of thing any more given the vast market swings that have occured in this space. For the retail investor, at least myself, the vast market swings completely overwhelm any value I may get by micro-managing small opportunities in YTW. I leave the heavy lifting to leverage small mismatches to the gurus like James.
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Feddar
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Preferred share Yield to Worst calculation

Post by Feddar » 08 Mar 2016 02:50

I know this is a complex question, but how do I calculate YTW for preferred shares? To make it easier, lets start with a Split Share, that effectively has a maturity date. The way I see it,

YTW = ( Dividends remaining + Capital appreciation ) / ( Current price * Number of years left to call date )
Capital appreciation = Par - Current price
Dividends remaining = Dividend * Number of dividends left to call date

Also, there is usually no Dividend payment on the call date, so
Number of dividends left to call date = Integer ( ( Call date - Current date ) / Number of dividends per year )

Is this correct?

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Shakespeare
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Re: Preferred share Yield to Worst calculation

Post by Shakespeare » 08 Mar 2016 08:59

“A wise man should be prepared to abandon his baggage at any time.” -- R.A. Heinlein, The Door Into Summer.

Feddar
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Re: Preferreds

Post by Feddar » 09 Mar 2016 09:48

Thanks for posting the calculator. I've gone through it, and noticed that the main difference between what I am doing and what it does is that it uses IRR (internal rate of return) on the cash flow to calculate the yield, where as I am using the raw dividends and calculating a raw yield.

What would be the advantage of using IRR? Does that take compounding into consideration?

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Shakespeare
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Re: Preferreds

Post by Shakespeare » 09 Mar 2016 09:56

Does that take compounding into consideration?
Yes. It's the standard way of calculating.
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Re: Preferreds

Post by Feddar » 09 Mar 2016 17:28

If I take all the dividends out and spend it (ie live off the investments), shouldn't i use a diffirent calculation? More like the one I outlined above?

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Re: Preferreds

Post by Shakespeare » 09 Mar 2016 18:20

IRR is generally used to compare assets on the same basis.
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Re: Preferreds

Post by Feddar » 09 Mar 2016 19:53

Ok, but it seems a bit misleading when i am comparing it to GICs, savings accounts, and bonds.

Can you comment on my formula?

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Shakespeare
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Re: Preferreds

Post by Shakespeare » 09 Mar 2016 20:05

GICs and bonds also assume reinvested dividends for a fair comparison.
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Re: Preferreds

Post by Feddar » 10 Mar 2016 07:22

Ok, I've worked through it again. I understand why using IRR (XIRR in fact) is important.

Now I'm wondering why, on the spreadsheet, the first dividend tends to be too high, and the last payment is above par.

Any ideas?

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Shakespeare
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Re: Preferreds

Post by Shakespeare » 10 Mar 2016 08:59

James Hymas modified my original spreadsheet www.telusplanet.net/public/kbetty/ytc.xls for "resets" which have variable dividends.
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Re: Preferreds

Post by Feddar » 10 Mar 2016 10:24

Thats not what I mean. The first div always seems to be high (not due to resets) and the principal repayment (the last entry) is above par.

I figured it out. He made the first div manually entered in cell E18.

The principle repayment includes dividends from the last dividend payment to the call date. I didn't think that you got this last bit. I guess you do, right?
Last edited by Feddar on 10 Mar 2016 10:32, edited 1 time in total.

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Re: Preferreds

Post by Shakespeare » 10 Mar 2016 10:29

The call price depends on the terms of the preferred and may be above par. Is what you may be thinking of as "the first dividend" (H2 my spreadsheet) the payment price needed for the XIRR function?
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