Recent Buy: Power Financial Corp. PF Series S

Power Financial Corp. (PWF)This morning I sold another chunk of my iShares bond ETF, CLF, and purchased 100 shares of Power Financial Corporation First Preferred Shares, Series S, at $25 per share. The current yield is 4.80%, just slightly higher than the common shares of PWF. The shares are rated Pfd-1 by DBRS, and P-1 by S&P, which are considered highest quality ratings.

Preferred shares (PF Shares) from Canada’s biggest companies are rarely offered with TD Waterhouse, and these new issues are usually gone within 20 to 30 minutes. I have been planning for several months to start adding PF shares to my portfolio, so when I received the email for PWF PF Series S this morning, I moved quickly. Only a few minutes after purchasing, the issue was closed. The shares were bought at the standard issue price for PF shares at $25 per share. This is my first purchase of preferred shares for my portfolio, and likely there will be more in the years to follow, especially in retirement.

Power Financial Corporation (PWF)

Power Financial Corporation (PWF), and its parent holding company Power Corp. (POW), is one of Canada’s largest financial conglomerates. PWF was one of my 2012 Stock Picks. Power Financial (PWF) is a 20.9 billion dollar holding company that has interests in Great-West Lifeco Inc., London Insurance Group, Canada Life Financial Corporation, Putnam Investments, IGM Financial Inc., Investors Group Inc., and Mackenzie Financial Corp. You’ll recognize Investors Group and Mackenzie as two of Canada’s leading mutual fund companies, which are actually owned by IGM Financial.

Preferred Shares, Bonds, and Trade Offs

Back in January 2011, I wrote an article on the power of preferred shares. It’s important to understand that preferred shares are not bonds, nor should they replace bonds in your portfolio. However, they can certainly be considered a fixed-income investment. They do have many similarities to bonds, such as a fixed rate of return, low volatility, and returns tied into interest rates etc. Retirees have long enjoyed preferred shares for their consistent dividend income and low volatility. For non-registered accounts where the dividends receive tax favourable treatment, preferred shares have been a winning investment.

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One of the drawbacks of a preferred share is they are “redeemable”, much like a corporate bond that is “callable”. That means they can be called back by the company at their discretion. However a premium is offered if that should occur, usually a $1 per share premium for the first five years prorated down to $0 over a ten year period. At the very least, the company will buy back your shares for the face value of $25 if they choose to redeem them. As long as you don’t sell your shares, especially with an interest rate increase, the chance of loss is minimal in my opinion.

The trade off is of course, is you don’t get the growth of your investment as you would with common shares.  This is why many consider preferred shares as fixed-income investments – you get the higher yield in return for capital growth.

Preferreds and Interest Rates

The other trade off, like bonds, is an increase in interest rates. In a Globe and Mail article last September, Preferred Shares: How to navigate rising rates, Rob Carrick wrote on the differences between “perpetual” preferred shares, and “rate reset” preferred shares.

The type of preferred share I purchased today, termed a “perpetual” share, is the most sensitive to interest rate increases. These types of preferred shares pay a continuous dividend until either they are redeemed (called back by the issuer) or sold. In the worst case scenario you could end up holding a preferred share with a rate far below a GIC and a share value well below the issue price.

The other type of preferred share is termed a “rate reset” and is considered the better of the preferred shares to purchase. That’s because the issuer of the preferred share has the option to change the rate on the shares. In an increasing interest rate environment, that’s a win, because most issuers would increase the rate of their rate-reset preferreds, or simply call them back.

Conclusion

If interest rates do increase, preferred shares may offer less volatility to my portfolio than bonds. This would especially be so if I can build a ladder of “rate reset” rather than “perpetual” preferreds.  If interest rates do not increase anytime soon, then 4.80% with low volatility is a pretty sweet deal.

Preferred shares will also smooth out market volatility on the equity side of my portfolio, while providing income. In addition, the common stock for Power Financial Corp. (PWF) has been on my watch list for a long time, and a company I nearly purchased back in December 2011. So although I would have “preferred” a “rate reset” issue, I’m pleased to add PWF Series S to my portfolio.

Readers what’s your take? Do you own preferred shares in your portfolio?

28 thoughts on “Recent Buy: Power Financial Corp. PF Series S”

  1. Well done! I too saw it coming through with RBC with a nice yield of 4.8%. No purchase though on my end. Any good preferred shares doesn’t last long on the market as you noticed 🙂 For anyone wanting to buy some, you need to realize that East coast markets are open by the time you get up – early risers will benefit.

    I too will be adding more preferred shares in the future.

    • PIE, thanks!

      What is your view of the effect of interest rate increases on Preferreds? Do you “prefer” rate-reset over perpetual? Yes you are right, get up early and check for new issues if you are in the market for them.

      Cheers. 🙂

  2. I was thinking to buy proffered ETF: PFF yield about 6% (for US exposure) into RRSP and ZPR or CPD (for ours) yield about 4.3% into TFSA. Originally i was thinking to buy only XPF (consists of PFF 50%), but after Brian’s article on another thread , I understood that is not tax efficient (I mena dividend witholding tax).
    Ninja, what do you think about those ETFs?

    • Hi Gibor,

      I had actually considered CPD in my own portfolio as well. I think the ETF route for preferred shares is a good idea becuase you will have the diversification, as well as a basket of “rate reset” and “perpetuals”. It will certainly mitigate overall risk, and still give you a decent yield.

      I can’t really advise you on these specific ETFs since I don’t really follow them or invest in them. The only thing I see as a consideration here is rising interest rates. Whether you own the preferred shares directly, or the preferred ETF, you will still lose share value when interest rates rise.

      Cheers

  3. That’s right, but losses from holding bond ETF or TDB909 imho will be more. Don’t you think so? Another question that I’m not sure about,how will react high-yield bond ETFs like HYG and JNK when rates are going up? Generally speaking rates will go up when economy will be more stable, thus high-yield bond defaults are less likely.
    Like HYG has YTM 5.4% and 739 holdings , so if couple of bonds will default it won’t affect greatly ETF performance…

    • Hi Gibor,

      I personally would not invest in anything that is a junk bond – so I have no comment on those kinds of holdings.

      Regarding bonds vs. PF shares any asset tied into interest rates will be influenced. I believe “perpetuals” are tied into the long end of the yield curve, which in fact may make them more susceptible. Honestly I have no idea. 😉

      What I do know is people who do have PF shares either get them called back at $25 value, or hold onto them forever. They provide consistent income.

      Cheers

  4. How does one sign-up to receive email alerts for new preferred share issues? Should I ask my discount broker or is there another way?

      • Thanks Ninja. I’m with questrade and will ask them for email alerts. I gained exposure to prefereds through CPD a few months back but am interested in selling some common shares of other companies to replace them with prefereds. Still new to self-directed investing (1 year anniversary coming up!).

        Thanks for your blog, keep it up!

        • Hi Phil,

          I don’t think I would sell my common shares to buy prefereds… you’d be giving up on both the potential share price and dividend appreciation of stocks already purchased. There is always the risk of rising interest rates on prefereds as well.

          If you are adding in new funds to your portfolio, or just realoacting as I did, then I think it’s fine.

          Cheers

  5. Ninja I’ve never bought preferred, so would like to ask you some stupid questions….:)
    I went to TDW New Issues, and see that Power Financial Corporation First Preferred Shares, Series S is now closed. So, I understand that I cannot buy it any more?
    How you can track price of this stock ? How do you know the ticker? Or you cannot redeem it at all? Oh , I found in description “The Preferred Shares are not redeemable prior to April 30, 2018”, so you cannot sell it?
    They write “The initial dividend will be paid on April 30, 2013 and will be $0.20055 ” , but it will be only 3.2% yield… or dividend payments are different and only total = 4.8%?
    There are no any Open preffered issues now, are they seldom?

    What button “Place Expression of Interest” means? Is it like placing order?

    This preferred stock gives you for 5 years much more than 5 years GIC. So, what is the risk to have preferred?

    • Hi Gibor, to answer your questions, and I’m sure many readers will also have the same questions:

      1. PWF Series S is a new issue. As mentioned there are very limited amounts available, and these issues don’t last long.

      2. The stock can be tracked on any financial website, but it won’t be listed until after the closing date which is Feb 28th. Go to PWF quote page on the G&M for example, and look for the “related securities” section down to the left. You will see other preferred shares there as well:

      http://www.theglobeandmail.com/globe-investor/markets/stocks/summary/?q=PWF-T

      3. “Redeem” means when the company buys it back, not when you sell it. You can sell your preferred share anytime after it is listed – if you wanted to. What this means is the company cannot buy back “redeem” the shares until that time. You get five years gauranteed to enjoy the yield.

      4. The initial dividend is only for 2 months, since its a new issue. The annual dividend is $120, payable at $30 per quarter.

      5. If you “Place expression of Interest” you are agreeing to buy the stock. Do not do so unless you intend to buy. You will be obligated for a minimum of 100 shares.

      6. I discussed the risks of interest rates in the article, like a bond you will lose share value if rates increase. A preferred share usually offers a higher yield than the common shares, otherwise nobody would buy a preferred share.

      Cheers

  6. I am new at this and learning a ton on this site from the Ninja and many good contributors. I believe they have just offered more PF’s because of popular demand. My question is how does one purchase these shares? I want to do my own DIY investing. Is quest trade, E-trade, TD? Any thoughts or comments would be much appreciated. Thanks in advance!!!!

    • Unbalanced, it’s really not a demand issue. Companies issue preferred shares when they need to rasie capital.It’s a debt obligation for them. 🙂

      Preferred shares are sold as a “new issue” however your broker handles them. You could also buy older issues on the market, just like any other stock. I think for a new investor, you are far better off going the ETF route, like CPD as an example. There are risks with preferred shares and interest rate increases.

      Cheers

  7. Hi Ninja,

    I am curious why you would choose the new preferred issue over PWF common, given that the difference in the dividend in minimal? As I understand it, the only protection of their payments preferred shareholders enjoy is the resolve of the company to continue paying dividends on the common. Should earnings cause these to come under threat, the domino of preferred dividends is likely to quickly tumble over as well (unlike a bond issue where to default has legal ramifications).

    With this being the case, is 0.1% (as well as a lower implied volatility) enough compensation for surrendering almost the entirety of the potential for capital and dividend growth while accepting most of the same dividend payment risks of common shareholders? I am a fan of your blog and interested in your analysis (keep up the good work!).

    Full disclosure: I own no individual preferred share issues. Long CPD and POW.TO.

    • Maybe I don’t understand something , but with preferred you guaratee to sell this stock for $25 and dividends are your gain, and common can be much cheaper?

    • Hi A,

      The whole issue of prefereds having preferential treatment on dividends, in the case of a company failure, to me is a non-issue. In fact if the company went under, no-one invested in the company with bonds or prefereds would get much of anything. 😉

      Sure I could buy the common shares at PWF for a similar yield. Fair enough, but I am looking for portfolio stability along with the yield. I am also focussing on an income generating portfolio. You can see that with your holding of CPD. This is simply another asset class for me to diversify income.

      Having a few preferred shares will smooth out the ride, and reduce the overall volatility of my portfolio – much like bonds. While I may give up on the upside capital growth in a portion of my portoflio, I will also protect on the downside as well.

      Cheers

  8. Ninja, lokks like I don’t understand anything 🙂 I meant you bought those shares at $25 per share. So, in 5 years from now will you be able to sell it back for $25 /share ? Or like common stock it can fall down to $18 or $20 ?

    • Hi Gibor, I see what you are asking. 🙂

      If you sell the preferred-stock five years from now or whenever, it will be whatever the price is on the market.

      If the company “redeems” the preferred stock, or calls it back from you, they will offer you the $26 to $25 per share as outlined in the offering and prospectus. They cannot “redeem” the stock for an initial 5-year period.

      You selling your shares, and the company “redeeming” them are two seperate things.

      Cheers

      • OK, this is I want to understand… usually (from past experience) after 5 years company “redeems” stock? So, if I buy it new issue now, and in 5 years this pref stock trades at $21, it doesn’t make sense to company to “redeem” it. Isn’t it?

  9. I have tried to buy preferreds from time to time but I am always too late, you mention getting an email how does one go about getting alerts of new issues?

    Thanks

  10. I’m curious about this purchase now that the price has dropped below the call price. I presume this is a downfall with straight perpetuals and interest rate risks.

    still a good buy or even better now that the yield is even better.

    • Chris,

      You’re comment is certainly timely… My PWF Series S is indeed down in value. Perpetuals (like long-term bonds) will lose share value as interest rates increase.

      I’m not sure I would load-up or buy more PFs right now. Like bonds you would lose value on your original principal.

      However, I am quite happy to earn a 5.4%+ current yield with my PWF PF Shares, and have no intention to sell. I am after consistent income.

      Also, in the past PFs were called away so investors usually got their $25 face value back. Not sure companies would do that in an increasing rate environment. But if they want to pay down their debt obligations they may buy them back. In that case they would have to honor the callable values (as outlined in the prospectus).

      Cheers. 🙂

  11. Curious how you calculate you’re earning 5.4% when you paid par value on a 4.8% pref? Did you buy more at a lower price to DCA?

    • Hi David,

      You are looking at the original purchase price of $25 vs the current share price ($22.22 in this example).

      The annual dividend of $1.20 per share on this stock remains constant (based on the original $25 purchase price). However the price of the stock varies. Dividend Yield and the price of a stock are inversely correlated. If the price of the stock decreases, then the dividend yield will increase.

      Dividend yield = annual dividend per share / stock price per share

      Original Purchase:
      4.8% = $1.20 / $25

      Current Dividend Yield:
      5.4% = $1.20 / $22.22

      Cheers
      DN

      • Yes, I understand.
        You said, “I am quite happy to earn a 5.4%+ current yield with my PWF PF Shares”.
        Since you paid par value, it means YOU are earning 4.8%. That will never change despite what the stock price is.
        You would only earn 5.4% if you bought at $22.22.
        Am I missing something?

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