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Sooty's Table of Canadian Banks Shares and Preferred Shares

2015 Update: The Effect of Basel III Global Banking Rules on Preferred Shares

In Canadian Banking regulations preferred shares are considered "Tier 1 Capital" when a bank is "stress tested" for viability. In Canada there is a strict minimum for Tier 1 Assets and it is beneficial for banks to issue preferred shares to meet this minimum. Canadian banks passed through the 2008 crash with hardly a scratch because the Canadian rules forced on them (including what made up Tier 1 Capital) were some of the best on the planet...but global problems are forcing changes in these rules.

In 2012 the Basel Committee on Banking Supervision established new global rules for measuring "capital adequacy". The rules are voluntary but if you want to do international banking you must sign up. The rules are implemented in a phased approach and Basel III affects preferred shares.

By 2022 banks can no longer use preferred shares as Tier 1 Capital. Banks are welcome to issue preferreds but they no longer have any benefit in the Canadian context. As we approach 2022 it is very likely no new preferred shares will be issued. Many of the existing preferred shares will be "called" and redeemed at the $25 face value (if that is allowed in the terms of the issue). If they are not called the terms will be "degraded" so holders will convert to common shares or sell them for better investments.

The story below is still valid for preferred shares until 2022 (not exactly set and forget). It remains valid for common shares forever (well at least the next 100 years)...back to your regularly scheduled programming...

If I Won a Million Dollars...

Everyone buys a lottery tickets. Even the smartest of us buy them a couple of times a year. They are a terrible investment. The expected return is 35% for a well run government lottery (invest a million dollars in tickets and expect to win $350K). The return from lotteries run by charities are less and returns from your local bookie are much, much less. You should never expected to win anything but what if you won?

"I spent most of my money on women and booze...and wasted the rest."

If you believe (as Sooty does) that you should expect to live forever. then a good plan would be to build an income stream that will last as long as you you don't have to work forever.

Forget the aggressive "value investor" from Investing 101. You want a safe income stream that you can buy and forget. A monthly cheque you don't have to worry about. One that keeps up with inflation.

This puts you in the market for dividend paying shares from big companies that have been around forever and will never fail...that is they violate the Investing 101 rule that all "stocks go to zero".

In Canada the big banks are about as close as you can get. Canadian banks are heavily regulated and very safe as evidenced by their easy pass through the 2008 crash. The Royal Bank has paid a gradually increasing dividend without a break for over one hundred years. Not quiet forever but close.

The rate of return is around 5% which means if you took a one million lottery wining and bought bank shares you would get a perpetual annual income of $50,000 (in constant 2014 dollars). Not enough for a gold plated Rolls but the income of an average Canadian. With all that free time you can take up painting, or write a book, or invent something.

Preferred Shares Terms and Conditions

Common shares make you an owner of a company so you get to vote on things like who is on the board and who audits the books. Since you'll never get more than the most miniscule fraction of the outstanding shares your voting rights aren't worth much.

Dividend paying common shares have risk. You get no dividend if the company makes no money. The dividend rises and falls based on company profits. Canadian banks are especially stable (because they are heavily regulated) and their common stock has always paid a gradually increasing dividend.

Canadian banks also offer a large number of preferred share issues. These exist in a realm between common shares and bonds. Like bonds they are non-voting so you don't get a say on bank operations. Also like bonds they come with a large number of terms and conditions. You need to read the Prospectus carefully to fully understand what makes issues from CIBC different from those issued by RBC. Even from the same bank there will be differences between their Series 15 and Series 21.

Many companies offer preferred shares and they can have an enormous variety of conditions (put "preferred shares" into Wikipedia). About the only thing "preferred" tells you is that their dividends are paid in full before the common share holders get any dividends. So you lose voting rights for a better place in line when the company is profitable. Ahead of you are the bond holders who always get paid in full even if the company is losing money.

Preferred shares from Canadian banks are easier to evaluate. You will find that all the banks and all the share issues from each bank have almost identical conditions (but check anyway). Below is an extract from the Prospectus (36 pages) for CIBC Series 35 Preferred shares (CM.PR.L):

For each five-year period after the Initial Fixed Rate Period (each a "Subsequent Fixed Rate Period"), the holders of Series 35 Shares will be entitled to receive fixed non-cumulative preferential cash dividends, as and when declared by the Board of Directors, payable quarterly on the 28th day of January, April, July and October in each year, in the amount per share per annum determined by multiplying the Annual Fixed Dividend Rate (as defined herein) applicable to such Subsequent Fixed Rate Period by $25.00. The Annual Fixed Dividend Rate for the ensuing Subsequent Fixed Rate Period will be determined by CIBC on the 30th day prior to the first day of such Subsequent Fixed Rate Period and will be equal to the sum of the Government of Canada Yield (as defined herein) on the date on which the Annual Fixed Dividend Rate is determined plus 4.47%. See "Details of the Offering".
The important condition is the "Annual Fixed Dividend Rate" which is usually reset every five years. These almost always float on top of the Government of Canada Five Year Bond yield (1.8% December 2013). In the CIBC example the share value is fixed at $25.00 so the dividend is 4.47% + 1.80% = 6.27% or $.39 per shared paid quarterly ($1.57 per share per year). The issue date is September 10, 2008 so the 4.47% may change on April 30, 2014 (but probably won't).

The bank preferred shares are almost always "perpetual" which mean they pay out their dividends forever. Occasionally the banks will offer you incentives to convert them into a new series (or force that conversion) but they are pretty much "buy and forget".

Buying Bank Shares

The advantage of shares is that they are perpetual, liquid, and you can buy them using a simple online stock market account. There is no similar clearing house for bonds which means bonds are harder to sell (less liquid). Bonds have an expiry date which means at the end of the term they pay back the principle and you have to go out and buy more. Bonds have more complex conditions so it is harder to evaluate alternatives.

Bank shares, especially preferred bank shares, look like bonds in terms of security and reliability. To that they add the ability to buy and sell easily or buy and hold forever. If you are convinced bank shares are the way to go the next step is to look at specific issues.

The naming convention for a stock listing is [common].PR.[series] so Bank of Montreal common shares are BMO and the J series of preferred shares is listed as BMO.PR.J. What happened to BMO.PR.A? Some time in the (distant) past they were converted into BMO.PR.B or they were only issued to a private buyer and never reached the stock market or the bank quietly bought up all the outstanding shares. In any case they are no longer available.

Why aren't all the preferred shares $25.00? The issues with lower interest rates are not as popular are the ones with better rates. If the average effective dividend is 5% then one offering 4% will sell for less than $25 and a 6% will sell for more than $25.

If you find a 4% share selling for $26 (or a 7% selling for $24) it probably has some special conditions that make it more (or less) valuable. You'll have to read the Prospectus to figure out whether you can take advantage of those special conditions. Remember we want a simple, no trouble, forever investment. Best avoid anything out of the ordinary. If you want trouble and excitement go read Investing 101.

In the table below clicking the column header will sort by that column. A short comment about the column will appear if you move the mouse over a column header.

Table last updated . A spreadsheet of the performance information for all 1500 TSX listed companies is at this link.

How the Table was Created - a Programmers View

To acquire, convert, reconcile and store the information to support this site is a fairly involved process. It would be nice if standards for the semantic web were in place and Sooty's computers could talk directly to the information sources. I am sure one could purchase an information feed in XML format but that would violate the rule that one should not pay for advice on public information. Besides it is a lot more interesting to build the robots that scrape the websites, tinker with the parsers that strip out the data from the html, and design the database and analysis programs that find the bargain trusts.

Sooty does not have time to do the work by hand so the whole process is automated:
  1. At 8:00 PM Pacific Time a Java robot scrapes the TMX QuoteMedia site for a directory of listed stocks. For each stock it visits the stock's "Financials" page on to obtain the home country and company web site.

  2. A Java database program reads the TSX directories and using the performance information from the "Balance Sheet" and "Income Statement" pages at it loads roughly 70 performance measures into a MySQL database. This is tricky because the Globe and Mail only displays data that is relevant to a stock (banks don't have inventory) but the MySQL database needs all possible column headers. The Java program adapts by including new data types when it encounters it.

  3. A Java reporting program reads the MySQL database and creates Comma Separated Value (CSV) extracts with all the available performance values. It also selects the 10 highest yielding non-USA income stocks to display and writes the JavaScript code that makes the tables on this page work.

  4. About midnight the CSV and table JavaScript code fragment are uploaded to this page.
The whole process takes about an hour to complete with most of the time consumed by delays in acquiring web pages.