i thought i’d time stamp a trade for you to give you an idea about how i operate. these securities are a little thin so i feel okay talking about them as we wouldn’t be able to throw big money at them anyway.
TSE: PPL-E - $15.90
TSE: PPL-C - $14.20
~8% dividend yield and i’m calling 20-30% capital gain as well in 2-6 months.
due to the relatively low risk profile at this price, you can lever these up as much as you want and turn it into a 60-90%+ return if you wish.
these prefs are trading $1-$2 below peer prefs for no good reason.
inflation and interest rate outlook is improving in Canada and North America as a whole, yet preferred shares haven’t really reacted yet. if we get a few months of even slightly positive economic data in North America and/or some strength in oil, the Canadian rate mentality could shift from rate cuts to hikes which could result in capital gains upside of closer to 50%.
a major peer’s preferreds, Enbridge, were up ~5% on average today, after rising ~3% on average yesterday.
the pref market has absorbed the last two preferred share issuances very well and the market looks to be healing finally.
these prefs should give you 2-3x the broad market return at less than half the volatility over most time periods under 5 years.
Hey Matt, these are trading below peer comps because the reset is going to suck on them. Your PPL-E will reset to about a $0.95/yr divi at current bond rates. These aren’t great trades. The only Canadian prefs I’m buying right now are the latest resets that have a floor. BIP has one, BAM has one, and PPL has one that I own (PPL-K).
Compare directly to Altagas and Enbridge prefs with similar maturity dates and reset rates. These are a bargain. The resets with a floor, while offering lower volatility, will end up returning a fraction of these mid-reset rate prefs that have a so-so chance of being called in 3-4 years. We own a few of these min rate prefs but they aren’t good trades, simply good placeholders in uncertain times. I’m not going to recommend PPL-K when I believe these two prefs are trading well below their direct peers and I believe we’re at an inflection point for interest rate expectations and their effect on rate reset prefs. As for the $ div at reset, $0.95 on $15.90 is still ~6%, ~1.5% above the yield on PPL resets in a normal environment (i.e. Normal spreads). There should be 10% upside just to play catch-up with peers and then we’ll need to see some shift in investor perception for the rest. That’s the game isn’t it? Predicting investor psychology?
For 6% yield I’m buying BIP.PR.B which has a reset floor, more diversified assets, a solid sponsor in BAM and a higher rating. It’s like a 5.9% yield. In fact, I own some.
There’s nothing wrong with the min rate prefs, just not enough upside for me in particular. IMO, there’s a 90% chance that all min rates are called at their reset date, and probably a 75% chance that they all trade around $26 in a year. You could lever the crap out of that trade too. Borrow at 3-4%, writeoff the interest and receive ~6% in dividends. You get a little spread normalization and you close out the trade. My personal stance is i’d rather take the extra 2% current yield and cross my fingers that we get some spread normalization or that interest rate expectations pivot upward sometime in the next few months to a year. On borrowed money, if I hold PPL.PR.E for the next three years until it’s reset date, i’m ahead 12% after tax with no committed capital, and if rate are the same, I’m primed to get a well above average 6% yield. Even if the five year is at zero at the next reset date, my yield is still historically above average for PPL prefs. After talking to a few pref fund managers, it is clear that the current record high spread is due to the upcoming calls on the old non-NVCC prefs that don’t count as Tier 1 capital and the banks’ unwillingness to finance at least some of these calls with common equity. The spreads will come in substantially within a year as the non-NVCC prefs are all called and/or if the banks suck it up and finance with common equity for the time being in order to lower the capital costs of their preferred share books going forward. I’m fairly certain that the banks will consider common equity over preferred equity at any higher than a 5.5% yield so this I likely the widest the spread gets. If we see the rally in the common equity of the banks, that alone may be enough to take pressure off the preferred market as the odds of common issuance, over preferred issuance, rises.
borrowed $20k, margined it 3x for $60k exposure, no equity. bought at $15.50 avg. sold at $17.10 avg. $6,000 with very low risk and no capital upfront. add that to being fully invested elsewhere and thats a decent two weeks.
I’ll have to re-read this thread and try to understand what happened later. I’m trying to learn about oil at a lackadaisical pace. I have a cold and nothing is registering this week, I’m not even going to try to figure this out now.
Seems like the performance was mostly driven by the oil rally though. Also (and I might be naive here) but it seems going 3X margin on a position levered to oil right now is risky but I have no idea and no conviction either way.
completely unaffected by oil. 100% driven by interest rate expectations. 10 bps increase in the 5 year bond rate to be exact. this was driven mostly by changes in U.S. interest rates not oil prices.