After 3 years of issuances of rate-reset preferred shares, perpetual preferreds are making a comeback, but are investors fully aware of the risks?
In 2013, 2 major issuers, both Power Financial Corp and Great-West Lifeco announced a $150-million deal for perpetual preferred shares. Both deals were way oversubscribed, pushing both firms to upsize the original deal.
Are perpetual shares a good buy?
These kinds of preferred shares issue dividends which are fixed at a set rate when they’re issued.
Second, preferred share dividends are more reliable than the dividends paid on a company’s common shares. If a company runs into financial difficulties, it first cuts common share dividends, then it cuts preferred share dividends.
Third, they are taxed efficiently. You benefit from the dividend tax credit, and this is their key advantage.
Fourth, perpetual preferred shares usually will pay more than retractable or rate-reset preferred shares.
First, perpetual preferred shares have no maturity date. That’s great if you want to lock in a set dividend for a long period. But it also makes the dividends very sensitive to interest rate changes.
As a consequence you can be victim to major price fluctuation. This is very important to consider.
Second, for a perpetual preferred share, the most common way you can get your principal back is to sell your shares on the market—and you might get less than you paid.
In most cases the issuing company can “call” or buy back the shares at a set price after a period of time if the price gets too juicy in relation to the share’s face value.
Third, rates are at an all-time low. This most likely means that based on historical observations, it is expected that rates will eventually go higher. This would have a negative impact on the price of the preferred share.
In conclusion, although preferred shares seem to have a safe nature to them, perpetual can actually be very risky if you buy them at the wrong time. Our group has access to extensive research that helps us navigate through all the different issuers. We also possess historical returns of all preferred shares on the market. Given the risk involved it is important to seek the help of a professional experienced with this type of investment. If you choose not to get professional advice, ensure that you do your homework and have as much information as possible.
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Stephane Ruah is Director, Wealth Management and Investment Advisor at Richardson GMP Limited You can reach him directly: 514.288.4018 or Stephane.Ruah@RichardsonGMP.com.
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