JMRD Market Observer for February 13th, 2015: Preferred Share & Energy Sector updateFebruary 13, 2015
**February 13th Issue of The JMRD Market Observer**
In This Week’s Market Observer
- What’s Happening in the Preferred Share Market?
- Oil & Gas: Is This Energy Rally For Real or Just a Head Fake?
- JMRD Basket Corner
- 2015 Tax Reminders
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
What’s Happening in the Preferred Share Market?
We wanted to touch on the current state of the preferred share market as it’s been volatile of late and many of our clients hold preferred shares in non-RSP accounts. There are three main types of preferred shares that we will discuss:
1) Floating Rate Preferred Shares– As the name suggests, the dividend rate floats based on a certain spread around the Bank of Canada Prime Rate.
2) Perpetual Preferred Shares – These preferreds have a fixed dividend rate and can be issued in ‘perpetuity’ (forever). The company issuing the preferred share has the option to call them (buy them back from the investor) at any time after a predetermined date.
3) Rate Reset Preferred Shares – This type of preferred share has been the most commonly issued of the three over the past five years. The dividend rate is fixed for the first five years, at which time a few possible scenarios can occur:
a. The holder can elect to exchange their shares for a floating rate version, if a certain percentage of investors wish to do the same;
b. The issuing company can buy the shares back from you at par (usually $25); or
c. The dividend rate is reset at a predetermined spread above the five year government of Canada bond yield. For example, say Royal Bank issued a 4% rate re-rest preferred share five years ago. If the reset rate/spread is 2.5% above the 5 year government of Canada bond yield (currently at 0.69%), the new dividend rate would be 2.5% + 0.69%, or 3.19%, obviously not as attractive as the original rate of 4%.
Three weeks ago the Bank of Canada lowered the short term overnight interest rate to 0.75% from 1%. The decrease in interest rates is typically good for equity markets, bonds and perpetual preferred shares, but not for floating rate or rate reset preferred shares, especially those with resets occurring in the next 12-18 months. Interest rates are expected to stay low in Canada and this shift in policy from the Bank of Canada has negatively affected the majority of preferred share prices.
We continue to believe that preferred shares offer attractive yields relative to other fixed income products. However, a client’s investment objectives must be considered first before an investment is made. We feel that diversifying a fixed income portfolio with GICs, principal protected notes, bonds and preferred shares – all of different issuers and maturities– is just as important as diversifying an equity portfolio by sector, geography and market cap (small, mid and large companies). Please do not hesitate to call or email if you have any questions on anything.
Oil & Gas: Is This Energy Rally For Real or Just a Head Fake?
WTI Oil prices continued their recent volatily this week, trading as high as $53.99 on Monday, a low of $48.05 on Wednesday before moving back above $52.00 on Friday. Brent Crude oil traded above $60.00 this week, the first time that has occurred in 2015. For Canadian producers, the Canadian dollar holding in around $0.80 is a positive for many producers, with Oil priced in US dollars. The Canadian Energy Sector is higher by over 7% this year, despite the lack of consensus on the near-term direction of oil prices. This sentiment was shared this week at NBF’s Energy conference. In addition, while little geopolitical premium is built into current energy prices there remains a number of concerns in the Middle East that could affect energy prices going forward. Natural gas prices have remained weak despite the very cold weather in much of Canada and Eastern United States. With that background, NBF provided an update on the sector and where investors should be focussing their energy allocation in the near-term. It is always difficult to time a bottom and we recommend investors have a weighting to the stronger names in the sector that have good balance sheets to whether the current environment along with a focus on oil production. (See Attached Document for more comments on the Oil and Gas industry)
Comparing the 2015 Energy Rally with 2009
Oil prices have rallied 14% over the past three days while many of the energy equities are up even more than this. It’s hard to say for sure if this is the turning point for a sustained oil rally, but it is certainly starting to look very similar to the 2009 recovery when oil equities bottomed and stabilized ahead of the commodity, and then went on to rally ~30% over the balance of the year. While there are obviously many differences between this oil correction (i.e., supply driven) and the 2008/2009 correction (i.e., demand driven due to financial crisis), we expect there to be at least two common themes between the two events: 1) Oil Prices will eventually recover and 2) Equities will lead the recovery.
To illustrate this point we have overlaid the WTI and oil-weighted equity relative performance from the 2015/14 period compared with the 2009/08 (dotted lines) period, and as can be seen the equities have led the recovery in both periods. While we expect there will be more volatility over the next several months, it is interesting to note that in 2009 the equities bottomed and stabilized at between -40% to -50% after approximately six months from the start of the sell-off, which is a similar point to where we are now in the cycle. The main point we want to make here is that now is the time to be building a position instead of trying to pick the exact bottom.
(See attached document for more Energy Rally details)
JMRD Basket Corner
Keyera (KEY) – KEY reported adjusted EBITDA of $128M beating NBF’s $115M estimate along with a 7% dividend increase to $2.76/share starting in Q2. The company also announced a two-for-one stock split effective April 1.
Interview with Keyera’s CEO, David Smith: http://www.bnn.ca/Video/player.aspx?vid=551078
TELUS (T) – TELUS posted strong Wireless 4Q results due to better than expected Smartphone sales that helped drive a ~$0.30 beat in Average Revenue Per User (ARPU) which continues to be the best in the industry. Higher retention spending, however, led to lighter than forecast margins.
All Cap Growth Basket
Fiera Capital (FSZ) – Fiera announced that it is acquiring Samson Capital Advisors for US$33.5 million. The transaction provides FSZ with an experienced U.S. fixed income investment team with US$7.6 billion in AUM. The deal is expected to close during the first half of 2015 and adds $9.5B in assets or in Assets Under Management as well as increase the mix of higher-fee private wealth AUM to 22%
FirstService (FSV) – FSV announced this week they plan to separate into two independent public companies — “Colliers International,” one of the top three global leaders in commercial real estate and “FirstService Corporation,” the North American leader in residential property management and services. After the separation, FirstService Corporation will be comprised of the current FirstService Residential and FirstService Brands divisions. Each company generates strong cash flow, has compelling growth
opportunities and a long history of creating shareholder value. Following the announcement, FSV traded higher by 10% over 2 days and a new-year high
CVS Health (CVS) – CVS Health Corp. reported earnings for the December quarter at the high end of its earnings guidance as growth in its Medicaid business helped to offset declines in retail sales because of the lack of cigarette sales. The retail pharmacy business’s revenue rose 2.9% to $17.7 billion. Store sales, excluding newly opened stores, increased 1.6%, with pharmacy sales gaining 5.5% to partially offset a 7.2% decline in front-of-the-store sales. The decline in front-of-store sales was due in part to the decision to stop selling cigarettes, the company said, though an increase in basket size did help stem the decline. Overall numbers were hurt by competition from recently introduced generic medications.
Sealed Air (SEE) – Sealed Air, the largest holding in the US basket, moved higher by 11% this week after the company provided an upbeat earnings outlook for 2015, as the company’s fourth-quarter earnings more than doubled on an income tax benefit. Sealed Air is the parent of brands such as Bubble Wrap cushioning, Cryovac food packaging and Diversey cleaning products. For 2015, Sealed Air said it expects to post per-share earnings of $2.08 to $2.18, above the $2.06 a share analysts polled by Thomson Reuters recently projected. The company forecast revenue of $7.4 billion, which reflects a 7% negative impact from foreign currency. Excluding currency effects, net sales are expected to grow 2.5%.
2015 Tax Reminders
- 2015 TFSA contributions – contribution limit $5,500.00 can be made in cash or securities.
- 2015 RESP contributions – contribution limit is $2,500.00
- 2014 RSP contribution deadline – Monday March 2, 2015. The 2014 maximum RRSP contribution limit is 18% of “earned income” in 2013, to an annual maximum $24,270. The 2015 contribution limit is a maximum of $24,930.
1) “Why Canada’s Snowbirds are under U.S. Scrutiny” (Globe and Mail)
2) “A longer retirement requires a better plan” (Financial Post)
Week at a Glance
(See attached Week at a Glance report)
Reads of the Week
- “What Do Low Interest Rates Mean for Stock Market Returns?” (A Wealth of Common Sense)
- “Law Students Leave Torts Behind (for a Bit) and Tackle Accounting” (New York Times)
- “Five reasons you should ignore the TSX composite index” (Financial Post)
- “As American Express courts ordinary spenders, rivals poach its wealthiest clients” (Bloomberg)
Monday February 16th – North American Markets Closed for Family Day and President’s Day holidays
Tuesday February 17th – Canadian Existing Home Sales, U.S. Empire Manufacturing
Wednesday February 18th – Canadian Wholesale Trade Sales, U.S. Fed Releases Minutes from Jan 27-28 FOMC Meeting, U.S. Industrial Production, U.S. Building Permits, U.S. Housing Starts
Thursday February 19th – U.S. Initial Jobless Claims, Philadelphia Fed Business Outlook, U.S. Leading Index
Friday February 20th – Canadian Retail Sales
Monday February 16th – None
Tuesday February 17th – Canadian Apartment Properties REIT
Wednesday February 18th – Northland Power
Thursday February 19th – Boardwalk REIT, Fortis, Goldcorp, Inter Pipeline, Newalta, Superior Plus, West Fraser Timber
Friday February 20th – Enbridge, Onex
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Categorised in: JMRD Updates