June 22, 2023

Thursday saw the S&P 500 up 0.4% while Toronto was down 0.6%.

Canadian Western Bank was down 2.5%. One thing in favour of CWB is that it does not have any of those variable rate residential mortgage loans. The bigger banks seem likely to incur some losses on those type of  mortgages.

AutoCanada was down 3.4%. Linamar was down 3.7%. 

I was looking today at the rate reset preferred share CWB.PR.D which is on our list. It was issued over four years ago in early 2019 at a time when these shares were very unpopular and the 5 year Canada bond yield was low. CWB had offer a dividend high of 6.0% to sell the shares at that time. That was a spread over the 5 year of 5.04%. That’s one of the highest rate reset spreads that I am aware of. After it was issued, the market for rate resets improved and the 5 year bond yield recovered from its lows and CWB.PR.D traded as high as $27.50 in mid-2021. In my several updates and comments about it, I did not like it much above $26 becasue I figured it would ultimately be redeemed at $25 on the reset date of April 30 2024. Even though the yield of 6% seemed quite attractive in 2021 I did not like the idea of the capital loss if redeemed and at that time it looked like CWB would redeem it due to its high spread (and therefore high dividend upon reset.).

But things have changed a lot. Now it trades at $23.78 for a yield of 6.3%. And now 6.3% is not as attractive as it was in 2021 since we can now get over 5% on a GIC. But in 10 months it is either going be redeemed at $25 (for a 5.1% capital gain) or it could reset to a very high dividend level given its high spread since it does not look like interest rates will move down much in the next ten months. Either way, this all seems attractive. If it is redeemed, we will collect just 3 more dividends for a yield of 4.7% plus the 5.1% capital gain, for a total return of 9.8% (on a holding of just over 10 months).  CWB likes having these shares as part of its capital structure, so it is possible that they will let the dividend reset significantly higher (assuming the 5 year bond yield is still above 3.0% in ten months), in which case the yield would be 8.5% of the current price or higher. 

I bought some today. In doing so I am trusting that CWB is not going to run into financial difficulties.



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