March 16, 2020
Now is Not the Time to Panic
Today is March 16, 2020 and it feels like the end of the world as we know it. Markets continue dropping with uncertainty surrounding the spread of COVID-19 and economic policies to help curtail a potential looming recession. The market correction we are witnessing is happening at faster paces than we have seen before. This isn’t a time to let panic set in.
The market has needed a correction for some time as stocks have traded at premium valuations. Some market indexes saw drops between 10-13% by the end of trade. Instead of panicking, take time to assess the value of your portfolio and determine whether there are opportunities.
One opportunity I continue to pay attention to is BCE Preferred Shares B. These stocks pay a monthly floating rate dividend. My current calculations show the stock down more than 42% from a month and a half ago when it traded north of $16/share. Today the stock can be purchased for as little as $9.42.
It is important to recognize the Bank of Canada recently implemented a 1% rate cut the past two weeks which significantly affects the yield for BCE preferred shares. Previously the shares brought in $0.08229 per month in dividends, which annualized to $0.99 or a yield of 10.48%. My new calculations taking account for a 1% rate cut show the company should pay out 2.95% on par $25/share, resulting in $0.7375 annually and a yield of 7.8%.
Preferred shares act similar to debentures in the sense that a company agrees to pay fixed or floating rates to the preferred share owner on a defined timeline (monthly, quarterly, semi-annually). However debentures eventually result in the return of principal while preferred shares continue to trade on exchanges and will rate reset usually every 5 years. Some preferred shares can be redeemed by the company at par or above par value, transferred into other classes of preferred shares, or even converted into common stock.
A preferred share also ranks higher than common shares in terms of liquidation preference in the event of insolvency. Furthermore a company is not able to pay a common share dividend until preferred shares are reimbursed for any past dividends accumulated during a period the company withholds the dividend. These are just a few reasons why I find the preferred shares attractive.
BCE remains a stable company which I believe will weather through a temporary slow down. At the time of writing I don’t see risk to the common share or preferred share dividend being cut which is why I’m bullish today’s $9.42 preferred share price is a steal.
Looking out 6-9 months I feel the impact of Corona will be settled and stocks will return to normalcy. If this holds true we can expect interest rates to slowly increase 1% higher to where they were prior. This means if current prices hold, when interest rates rise the yield on the stock can increase from 7.8% to 10.48%.
My 12 month target for BCE preferred shares is $14-16. At the time of writing I am long BCE preferred shares.