Long-time readers here should remember that I referred to a specific security as cash parking vessel. I didn’t make it much of a secret, but I was referring to DREAM Unlimited’s preferred share, which has been redeemed at the end of 2019.
There has been a lot that has happened since then and now! During the COVID crisis, there were a lot of good opportunities for fixed income investors in the form of bonds, preferred shares and income-bearing equity (in addition to others). Today, however, when scanning my fixed income lists, it is a total wasteland – generally the reasonably safe returns will give you a 5% dividend, while marching up the risk spectrum (e.g. Bombardier’s BBD.PR.B) will get you about 7.3%. It is slim pickings.
The next nearest cash-parking vessel is Birchcliff Energy’s (TSX: BIR.PR.C), which I have written about during the COVID crisis. Unfortunately, it, along with its twin cousin, (TSX: BIR.PR.A) is likely to get called out over the next 1.6 years – I am expecting the company to redeem the latter for par on the September 30, 2022 rate reset date.
It is very tempting to leverage up on “safe” preferred shares yielding 5% or so and finance it with 1.5% margin debt, but as the market instructed people 12 months ago, doing so can be very financially hazardous in the event of a collapse in asset prices.
2020 was a fantastic year for preferred shares. Very, very briefly the yield on CM.PR.O was over 10%. I couldn’t help myself and loaded up on them.
I maintain my own spreadsheet of preferreds, similar to your debenture list. They certainly don’t look as appealing as they did a year ago.
With so many of these being rate reset prefs, and yields being tied to the Government 5yr bond, alot depends on the direction of interest rates. For example, CF.PR.A currently yields 6.19% at $15.70. If it were to reset in 9.30.2021 at the current GOC5 of 0.9%, the new yield would be 6.54%. Should GOC5 rise to 1.5% then new yield is 7.5%, and so on….and that wouldn’t surprise me given how quickly yields have been rising/steepening. Price appreciation of course would follow. It seems to be correlated to the price of oil.
I’ve held the CF.PRs in the past but not presently. In addition to them and RCG (formerly GMP) I always wonder how the heck they were savvy enough to get them out at $25 par value. I do not see them compelling at current prices.
As for when 5 years recover (if ever) Hymas forever has speculated that these rate resets are speculations on the rate itself, but as most of them now have reset at the ultra-low 5yr rate one would presume that the only way forward is up… unless if our yield curve turns into Germany (-0.62% right now!)…
A safe pref yielding 5% is probably much too high with the 5yr Bond at less than 1%. I would expect to see that yield drop to 4% or less.