Is there Value in the Canadian (S&P/TSX) Preferred Share Index Weakness?

Trying to make sense of it all.

The preferred share index is down 6.6% on the year (and 7.7% from late November)

Let's start with the composition of the index:

(click on the chart to enlarge)

• Almost 2/3 of the index are financial institutions.
• Some of the weakness could be a function of exposure to energy.
• However, looking a little deeper: approx. 2/3 of the index is made up of fixed-reset preferred shares that usually have reset options (by the issuer) after a 5 year term.
• As the dividend yields were considerably higher 5 years ago, a good deal of the resets which are coming due are either being matured or having their dividend payout reset to lower yields.
• New issues being added to the index now have considerably lower yields.
• Some of the "perpetual" preferred share issues that also had considerably higher payouts are being matured as well.
• In a nutshell, it is expected that the cumulative dividend yield will likely move lower and as a result, investors are moving out of this asset class (selling and driving prices lower).
• Lower liquidity levels in the preferred share market can help to exaggerate this move to lower prices (higher yield, near 5%) and it appears that there may be some good buying opportunities developing.
• Certainly, relative to other yields (bond markets), which have been moving lower so far this year, there may be reason to keep an eye on this developing situation.

The views expressed are those of the author, Scott Tomenson, a Raymond James Financial Advisor (for one more day), and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor's circumstances and risk tolerance before making any investment decision. The information contained in this blog was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.