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Equitable Group 6.35% Pref Share
August 7, 2014
2:22 pm
AltaRed
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That is a huge premium over competitor issuers. At the Sept 30, 2019 end of the first 5 year period, they will reset at GOC 5 yr bond + 478 basis points, again a huge premium over competitor issues...even utilities and pipeline companies. Must be non-investment grade and thus low risk may be in the eyes of the beholder.

August 7, 2014
3:07 pm
Jack Manning
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Just to make sure people on this forum know that any type of Canadian preferred shares, common shares and other Canadian equity, share investments like mutual funds, ETF's that hold Canadian corporations are eligible for a dividend tax credit for cash or non-registered accounts only.

All RRSP's, LIRA's, RRIF's, LRIF's, LIF's, RESP's, TFSA's and other tax deferred accounts are not eligible for the dividend tax credit.

This is very important for people to know and understand this.

August 7, 2014
4:29 pm
Loonie
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You don't need a dividend tax credit for TFSA as it's never taxed.

August 7, 2014
5:03 pm
Jack Manning
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Loonie, another important piece of information regarding preferred shares, common shares, equity, share investments like mutual funds, ETF's etc. is that if there ever are any losses, capital losses as well, they can only be applied against other capital losses in a cash or non-registered account or accounts.

RRSP's, LIRA's, RRIF's, LRIF's, LIF's, RESP's, TFSA's and other tax deferred accounts are not eligible for losses, capital losses.

I know TFSA's are not taxable but I still want to make sure that people understand and know they can't take losses, capital losses on money in their TFSA's.

August 7, 2014
5:28 pm
AltaRed
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We will have to see what the market thinks once they start trading. All the IPO prefs issued by the banks, lifecos and pipelines/utilities have been selling very quickly this year. Investors looking for yield. That said, they find a trading range commensurate with risk perception. I suspect they will trade above part given Equitable is a bank.

I have not looked at the prospectus but I suspect these prefs are NVCC compliant due to Equitable being a Schedule 1 bank. Investors should know that OSFI could force conversion of NVCC compliant issues into common equity in event of bank failure. IOW, shareholders take first risk to mitigate risks of taxpayer bailouts. That said, it seems investors have not disounted for conversion risk in any of the big 5-6 pref offerings this year.

August 7, 2014
8:44 pm
Jack Manning
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Brian, yes, I meant to say was capital losses can be applied to only other capital gains. Thanks for clarifying that.

My main point was that only in cash or non-registered accounts can this be done. Many people think that capital losses can be deducted from any other types of income such as interest, dividend, investment income, employment income, pension income, annuity income etc.

This is not true and to make things worse, since most Canadians have a big chunk of their money in RRSP's and TFSA's than cash or non-registered accounts, it is a double hit when any investment loses money in RRSP's, TFSA's and other tax deferred accounts.

August 7, 2014
9:03 pm
Loonie
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August 7, 2014
10:46 pm
Jack Manning
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Their preferred shares are non-cumulative meaning that any quarter dividends are not paid, the investors loses that money for good. Basically, it is not obligated to be paid.

It is not like a mortgage or other debt obligation that is expected to be paid on a timely manner. Maybe this is why their 6.35% rate is much higher than most others in the 4.00% to 5.00% range.

August 8, 2014
2:04 am
Loonie
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I must admit to some confusion regarding the rate.
First, I don't understand the jargon, so would have had no idea what non-cumulative meant, but it does sound like they might not pay during a downturn. I understand that some of the big banks had to cut their dividends in the last downturn, although they bounced back.
According to what is written in their announcement, could Equitable, if necessary, reduce their dividend and then put it back up again later, or would the only option be to actually miss one or more dividend payments entirely? Is this dividend structured any differently than the majority of preferred share dividends?
What is the point of announcing a rate, for 5 years no less, plus establishing a formula for a rate even beyond that, and promoting the product on that basis, if there is no obligation to pay it? I don't get it.
I was under the impression that dividend rates were normally set from time to time in response to the success of the company. Is that not true?

August 8, 2014
7:06 am
Brimleychen
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For those looking for the investment on Preferred shares, I think you'd better invest directly on common shares because of liquidity. For PR holders, you're totally at the mercy of board. Even worse, you are very difficult to get out.

I read some article before, it stated that 70% of investors are losing money (sorry, I tried to find the article via google, but I was not successful).

Two examples,
Sun Life Financial PR.A has been under water since 2005.

TansAtla sold at $25 at 2010, and now at $18.

Do you homework, and there are no easy money.

I would like to recommend those who interest in PR follow this web site http://prefblog.com/

August 8, 2014
10:00 am
AltaRed
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I have been in the preferred share market for some time. As said upthread, http://www.prefblog.com/ and http://www.prefinfo.com/ are excellent sources for preferred shares. James Hymas does an extremely good public service with his blog. There are way too many moving parts to preferreds for anyone here to cover the subject adequately.

Preferred shares are of many types. The most common are perpetuals, callable only by the issuer, and there are various types... those with a permanent dividend rate (forever) and Fixed Reset where the dividend rate typically can change every 5 years (an initial 5-6 year period upon issue) and then subsequent 5 year periods where the dividend rate is set at GOC5 (Gov't of Canada 5 year bond) + X basis points. The X is set at time of IPO and is usually about the Initial Period yield less the current GOC5). Example: If the Initial Period dividend rate is 5.25% and the GOC5 is currently 2.65%, then the X is usually about 260 bp. What the Initial Period dividend rate is.... depends on the issuer's credit worthiness and what the underwriters insist is necessary to market the issue without them getting burned in a bought deal. Fixed Resets are the most common type of issue now because investors know that government bond rates are more likely to go up than down in the future.

Preferred pricing acts much like corporate bonds. Prices go down (below par of $25) if perceptions of forward interest rates go up and/or credit worthiness of issuers decreases. The reason to buy a Cdn corporate preferred over a bond is the eligibilt dividend tax credit in taxable accounts... and since I have no RRSP room to speak of, most of my 'pseudo fixed income' is in my taxable account and thus the reason for preferreds.

The issue of non-cumulative versus cumulative means that if an issuer misses a dividend payment, then there is no obligation to make that up in non-cumulative whereas the issuer must make it up when the issuer calls the cumulative preferred share. It is not as discussed above that the investor is at the whim of the Board with respect to dividend payments on non-cumulative prefs. The preferred share has higher seniority than common shares and the dividends must be paid on prefs before any dividend is paid on common shares. Likewise in a windup, secured bond holders are paid out first, then preferred shareholders, with common equity shareholders figting it out with unsecured creditors.

There are some preferred shares issued as non-cumulative and some issued as cumulative. The latter is always better but with high creditworthy firms, investors do not seem perplexed with non-cumulative preferred shares. I do not make a distinction on non-cum versus cum BUT then I do not buy non-investment grade prefs (would not buy TransAlta for example nor have I bought PPL (Pembina) nor ALA (AltaGas) prefs). Imagine that - credit rating agencies do not consider Pembina Pipeline nor AltaGas as investment grade. Imagine what they think of the common shares!

Bottom line: I can buy Enbridge or Fortis or TransCanada or Canadian Utilities preferreds at similar yields to Pembina and AltaGas so I can ignore the latter. TransAlta prefs trade at a discount today because the company is considered a credit risk -- just as their corporate bonds would be.

Prefs are not for everyone. They are priced like bonds but also are susceptible to steep price discounting due to credit worthiness. All prefs took pricing hits back in 2008 and 2009 during the financial crisis. They fit a niche in one's portfolio and need much study and learning before investing in same.l

August 8, 2014
10:36 am
AltaRed
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Let's look at one example that I have bought: FTS.PR.H

Per http://www.prefinfo.com/, it was issued January 11, 2010 and started trading on January 25, 2010. It is a cumulative Fixed Reset of 4.25% dividend yield, with first issuer redemption (call)possibility and dividend yield reset being June 1, 2015 at GOC5 + 145 bp. Credit rating of Pfd-2(low) with is investment grade. The call price would be $25. Now look at a 1 and 5 year chart http://web.tmxmoney.com/quote......l=FTS.PR.H of this issue. It traded at or above its issue price until summer of 2013 when bond rates went up due to perceived interest rate increases. FTS.PR.H price took a hit just like REITs and corporate bonds did. I took advantage and bought FTS.PR.H in November 2013 at $20.80 for an effective yield going forward of well over its initial yield of 4.25% on $25 par. That pref is now a winner in my portfolio wether FTS redeems it or not on June 1, 2015 (if no redemption, the reset rate will be acceptable and if redeemed, I will get a capital gain of $4.20).

One might now ask why the share continues to trade well below $25. I believe it is primarily that with June 1, 2015 not far away, there is little hope that GOC5 bonds will be much above current rates and the new dividend rate will be less than 4.25% (GOC5 + 145 bp). There is also the possibility that Fortis could redeem at $25 and issue a new pref series with a lower dividend yield than 4.25% (possibly but I doubt it).

If you want to see the effect of 2008/2009 on a perpetual (non-reset), take a look at Great West GWO.PR.G. Imagine if one had bought that issue in late 2008 circa $14.

If one is really interested in investing in prefs, I certainly recommend the purchase of PrefLetter from James Hymas. But beware: It takes a lot of learning/education to buy smartly and to diversify one's pref holdings as well.

August 8, 2014
10:52 am
hdubya
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Please note the following is for information purposes only and is not a recommendation or solicitation with respect to investing and securities. Please do proper due diligence before making investments, and seek counsel with a qualified financial professional if you cannot do this due diligence on your own.

There are a few things I would like to point out:

1) The Equitable Group (holding company) is not the same as Equitable Life. The Equitable Bank is a niche mortgage lending company (former trust company), while Equitable Life is a life insurance company. Equitable Life is one of the few remaining mutual companies in Canada which means that the company is owned by its policy holders, and not shareholders. I am fortunate enough to be old enough to remember this as most insurance companies demutualized in the 1990’s (I am 29).
2) The Equitable Group and Equitable Bank have a BBB and BBB(low) ratings by DBRS. This was confirmed by DBRS on June 26, 2014. The report was released July 8, 2014.
3) There are many different provisions, especially, for preferred shares. Different series have different provisions and reset rates/prices. For example, GWO.PR.H and GWO.PR.N are very different. Read the prospectus carefully. Different risks exist as well (call risk, reset risk, and etc.).
4) Preferred shares and common shares have their place in portfolios depending on the clients’ investment objectives. One isn't "better" than the other, and one could be favorable than another depending on market conditions.

August 8, 2014
11:02 am
AltaRed
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Brimleychen said

For those looking for the investment on Preferred shares, I think you'd better invest directly on common shares because of liquidity. For PR holders, you're totally at the mercy of board. Even worse, you are very difficult to get out.

I read some article before, it stated that 70% of investors are losing money (sorry, I tried to find the article via google, but I was not successful).

The trading volume on prefs is much lower than on common shares and is mostly a retail investor product. Thus liquidity IS less than on commons and in a crunch, a holding of any significant size could be hard to unload. Also due to lower liquidity, it can be hard to buy more than a few hundred shares at a time unless one has access to Level II quotes (which I do).

I would like to know the source of that 70% figure, but I suspect it is highly partisan and a result of data mining. Perpetuals bought pre-2008 would most likely still be underwater if not yet called by the issuer and pref ETFs like CPD purchased pre-2008 would likely be in the same situation. CPD behaves like a long term bond fund. The duration is probably in excess of 10 years and thus it will take that long (or longer) for pre-2008 investors to recover their capital (but getting eligible dividends all this time).

One needs to decide why they want to hold preferreds. They should always be a long term hold in non-registered accounts.

August 8, 2014
11:31 am
Loonie
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I am definitely the amateur here. I like to learn more, but, realistically, it is beyond me to make an intelligent decision to invest in this type of product right now, so I will pass.

I can't remember which banks took the hit in the last turndown, but I did read that some of them did.

I do try to read things that will help to educate me, but the more I read, the more complicated I realize it all is, and not a game for amateurs. On the other hand, I'm not willing to fork over 1% or 2% of assets to get professional advice from someone I really don't know which offers no guarantees in such a low-return environment.

In one of the books I read, they suggested that buying dividend-producing shares (in sound companies, of course) was a good idea for people in retirement who need a steady income stream because the dividends will be more likely to hold up even when companies and markets go through rough spots. They said that the companies would rather have the stock price fluctuate than the dividend because people are more likely to sell their shares if they are not getting their dividends than if the price goes down. As long as the company is returning dividends, the idea was that people were more likely to hang on, creating the stability needed for the company to recover, thus improving the odds that they would indeed recover, and making them inherently more stable.
This may be common wisdom to everyone else, but it seems to me that it might impact the decision about buying, so I thought I'd throw it in for the sake of people who might be reading this and who know even less than I do.

August 8, 2014
11:56 am
AltaRed
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Loonie said

In one of the books I read, they suggested that buying dividend-producing shares (in sound companies, of course) was a good idea for people in retirement who need a steady income stream because the dividends will be more likely to hold up even when companies and markets go through rough spots. They said that the companies would rather have the stock price fluctuate than the dividend because people are more likely to sell their shares if they are not getting their dividends than if the price goes down. As long as the company is returning dividends, the idea was that people were more likely to hang on, creating the stability needed for the company to recover, thus improving the odds that they would indeed recover, and making them inherently more stable.
This may be common wisdom to everyone else, but it seems to me that it might impact the decision about buying, so I thought I'd throw it in for the sake of people who might be reading this and who know even less than I do.

Reasonable observations to some degree.

As investors know, it is Total Return (TR) that matters in non-guaranteed investments, i.e. combination of capital appreciation and income (e.g. dividends). Studies show that companies that pay dividends on average have a slightly better TR than pure growth companies over the long term and that is often because dividend paying companies must be more conservative (usually more mature companies) on their re-investment programs to ensure they have the cash flow to pay dividends quarterly. That said, people invest for different reasons and many would forego dividends for chances at strong growth (trusting management that management can re-invest their profits better than investors can via dividends). Stock prices are thus usually more volatile for low, or no, dividend paying companies.

It is true that most people in (or approaching) retirement prefer more stability in their investments and prefer to have more of their income in dividends than capital gains. I am 8 years into retirement and while I look at the concept of TR in my investments, I also consider capital risk and thus prefer dividends over capital gains. Thus my portfolio is structured into dividend paying common shares, REITs, preferred shares, some bonds, and a 5 year GIC ladder....in decreasing risk (and TR) level. It helps me sleep at night. That portfolio is likely not the best for someone starting out investing in their 20s or 30s.

For clarification, my posts on preferred shares above are not in any way intended to promote them, only to enhance understanding for readers here. They are not an easy investment to understand and not for the majority of investors.

August 8, 2014
2:46 pm
Loonie
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AltaRed, do you think, then, that common shares are easier to understand? I notice you said you invest in both of them.
Do you think one needs an "advisor" to sort this stuff out or can one learn about it somewhere in a systematic way?

August 8, 2014
5:45 pm
AltaRed
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Anything can be learned. I started from scratch learning from, in particular, the Financial Wisdom Forum (FWF) and its predecessor....going back to about year 2000. Depends on the time one is willing to spend and interest one has in the subject. As an example regarding preferrred shares, I learned via the Preferred thread on FWF, Prefblog.com and subscribing to PrefLetter.

Commons are likely easier to learn because there is a lot more material on the net (which can be contradictory of course). The key is the KISS principle, i.e. keeping it simple. Couch potato investing per finiki and Canadian Couch Potato serves 90% of retail investors perfectly well, and often better than stock picking.

In other words, figure out the basics of investing first and one might find out that stock picking isn't all that it is made out to be. A portfolio of index ETFs and/or mutual funds is perfectly fine. For that, no one needs an advisor.

August 8, 2014
6:00 pm
Loonie
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Thanks for the ideas, AltaRed. As you say, it all takes time, although I am interested in the subject. When I was a kid in the 1950s or so, there was a board game called Stock Trader, and it was my favourite game, although I no longer remember how it worked. Does anyone remember it?

I have been fascinated by the Couch Potato strategy although have not dipped my feet in. I am more attracted to the idea of being in control of the specific investments, but it may be more than I can handle.

August 10, 2014
11:16 pm
Jack Manning
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I was just surfing the web and I found a website, http://www.investingforme.com that has information about specific different types of preferred shares.

I am in no way affiliated or associated with this website or company.

Please write your comments in the forum.