On Wednesday the S&P 500 was down 0.6% and Toronto was down 1.2%.
Strong retail sales figures for the US are dashing hopes of an imminent decline in interest rates. The five year Canada bond yield is back above 3.5%. Lower oil prices weighed on the Toronto index.
TFI International was down 3.0%.
Royal Bank announced today that it will not be redeeming its rate reset preferred share Series BO. The press release did not give the trading symbol which is very annoying. (Likely some lawyer suggested no including the symbol for some reason.) The symbol is RY.PR.S and we have that one on our list. These shares qualify for the bank as non-viability contingent capital. I believe that means they would be converted to common shares in the very unlikely event that RBC runs into significant financial trouble. This feature is meant to protect bank depositors. And it is perfectly correct and right that depositors should be protected well ahead of investors.
If the 5 year Canada Bond yield is at 3.5% on the reset date of February 24 (It’s 3.53% today) then the yield on these will reset to 5.9% of $25 or $1.47 or about 6.5% of the current $22.65 price. Basically, RBC probably can’t redeem these and issue new ones at a lower rate. So there is no incentive for RBC to redeem these it seems.
It’s not that hard to find a 6.5% yield today but it’s not a bad yield for investors given the strength of RBC. However the dividend might well be lower at the next reset in another five years. And investors have had a bad experience with rate reset shares over the years. Therefore it’s not clear that these shares will offer capital gains. They could fall in price of course.
If investing in preferred shares it seems wise to have some diversity of companies and to have some perpetuals as well as some rate resets.