Canadian Western Bank Preferred Shares Stock Report

Canadian Western Bank Rate Reset Preferred Shares

Canadian Western Bank Preferred Shares Series 5 (CWB.PR.B)
Author(s)’ disclosure of share ownership:  Author(s) do hold shares
Last updated: 11-Jun-18
Share Price At Date of Last Update: $24.33
Yield: 4.5%
Currency: $ Canadian
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): Buy rated at $24.33
SUMMARY AND RATING:  These Canadian Western Bank Preferred shares (CWB.PR.B on Toronto) were issued at a price of $25.00 by prospectus dated February 3, 2014 paying 4.4% on a $25.00 amount ($1.10 per year).  Note that preferred shares can have customised aspects that affect their value. We have described the basic features here but we do not guarantee completeness or total accuracy of this description. For more detail consult the prospectus on sedar.com.  On June 11, 2018, they traded at $24.33 to yield 4.52% per year. If held in a taxable account, they are eligible for the dividend tax credit. The dividend is non-cumulative (In the unlikely event that they skip a dividend due to financial difficulty, you will never get that dividend). The dividend will reset every five years (starting April 30, 2019) and will be set at the yield on the five-year Canada Bond at that time plus 276 basis points. If the five-year Canada bond remains at its recent yield of 2.14%, then these shares would reset to 4.90% of $25.00 , paying $1.225 per year. That would be a yield of 5.0% on the current price. We understand that the Bank cannot redeem these shares before April 30, 2019, but on that date (and on each future 5 year anniversary) can redeem at $25.00. Redemption would be expected to occur if the reset yield is much above the current yield that the bank could pay by issuing new preferred shares with similar features – which is probably not that likely. These preferred shares are subject to a market value decline if Canadian Western Bank’s outlook worsens and there is some potential for dividends to be skipped or for the Bank to go bankrupt with no recovery of this investment. However we suspect that the possibility of such a bankruptcy scenario is quite remote. The Bank can convert these preferred shares into common shares in the event of a triggering event whereby the bank’s financial viability is in doubt. We consider the chances of that ever happening to be very remote. These preferred shares are rated Pfd-3 by DBRS on a scale of 1 to 5, where 1 is the strongest.  On the prospectus date the five year bank of Canada yield was 1.58% and therefore the spread was (4.40-1.58) 2.82%. Due to the rate reset feature, these shares are not as risky as perpetual preferred shares in terms of the risk of an interest rate increase. In fact, higher rates at the reset date will be beneficial. However, investors have learned that rate reset shares are risky in terms of interest rate decreases. We would rate these shares a Buy for those looking for relatively safe fixed income and willing to hold for the yield and satisfied by the expected reset yield int he range of 5%.  There is the potential for a modest capital gain but given the right of the bank to redeem these in April 2019 the upside might be limited to about $26 and perhaps $25 is more realistic.  If the five year Bank of Canada rate declines then these shares would be expected to decline in price for that reason. There is little to no insider trading signal due to no recent trades and very little insider holding. In Summary these shares are rated, Buy rated at $24.33. Given there is some potential for a decline, these should only be purchased by those who would be committed to hold for the yield in the event of a price decline.
INSIDER TRADING / INSIDER HOLDING: There has been no recent insider trading. There is also very little insider holding. It appears that six insiders own shares ranging from 1000 to 4000.
Symbol and Exchange: CWB.PR.B, Toronto
Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.
DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.
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