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Preferred C. This will reset at the 5 year Canada rate, around 3.75%. Why is it at $18, instead of $25, which would normally be the issuance value? 5-6 years ago, the rage was Reset Preferreds because rates were low and if rates went up, there would be a higher yield when it reset. Instead of going up though, rates fell. Therefore at reset, at 3.75% over our Canada 5 year of about 80 basis points, it is going to be reset with a 4.5% yield. The risk doesn’t necessarily correspond with a 4.5% yield that you would get on other safer preferreds. The market doesn’t like that, so it is not going to pay you for value. As long as interest rates stay low, it is a great thing for the issuer because it is a cheap preferred. Unfortunately, it will trade at around $18 for a while.
If rates go up, typically utilities underperform. However, if rates are going up because of inflationary pressures, regulators typically raise the rate of return on the underlying assets. They have a big acquisition in the US which left them in good stead. They’ve done a good job in growing dividends and this is a good kind of core holding.
This has been quite active in acquisitions. They bought Washington Gas & Light company in the DC area, as a big foray into the US. They feel it provides them with some unique diversification, as well as a kind of rollup capacity in the market. It is going to be a “show me” story, and is going to take a long time. In the meantime, they’ve suffered with the oil/gas patch in general. It’s quite exposed to gas in its midstream operations. He believes the 6% dividend is safe. It probably won’t be growing as quickly as it has, because they have to absorb the WGL assets. They successfully raised capital. Thinks they are in OK shape, but doesn’t feel this is the best place to be in that space right now. Prefers others.
He owns this for 2 reasons. It began as a hotel for railroads. 1. It has some nice growth potential as they roll up smaller hotels in and across the US. 2. He likes its real estate outside of Canada, so you get exposure of the real estate sector, without having assets tied up in Canada. If the Cdn$ goes down, he has an asset that appreciates in value.
A core holding for him, but wouldn’t buy it today. Has had a really, really nice move. It’s been a great portfolio investment, but it is now getting a little toppy. The RSI (relative strength indicator) shows a sense of enthusiasm. As it ran up to the mid-$60s, enthusiasm got quite high. He’d like to see that wane before he took another position. Great yield.
This, by default, is a contrarian company that happens to be in the utility space. This is coming back. They’ve had to do some major cost cutting. They’re converting some of their coal plants to natural gas in order to avoid some carbon tax. The beauty of utilities is that they do generate cash flow. The question becomes, how sustainable is that cash flow. Feels you can do better elsewhere.
You are basically looking at key infrastructure assets, that will do very, very well as we continue to expand the oil sands, tank storage in particular. Those are crucial assets that would be very, very difficult to replace. There are better names to own in the area, in between the pipeline and the producer. The dividend is high, and they are going to have to grow into that. At this stage, he thinks you can find companies that have already done the growing of the dividend.
A really good time to be taking a look at this, because it is a great contrarian play. They stretched to make their acquisition and have to make dispositions of assets. Probably took on a little more debt than they probably might otherwise could, and diluted the equity down. That asset sale aspect is troubling at a time when oil prices are $45. Who are you going to sell those assets to.
Market. This market doesn’t want to give up. It is an interesting market from a lot of perspectives. He is Long equities, more so than normal, but still has a lot of cash. Doesn’t believe in the bond market. A lot of things have gone right; the volatility index VIX, is at an all-time low and markets are at an all-time high. Interest rates continue to creep up, which is typically is a headwind. Corporate earnings have been good, but are in the areas that nobody is buying. Canada, after having been the best performing market last year, has really lagged, not just in energy and materials, but financials as well. Today he is 80% in equities. Of that 80%, 16%-18% would be in the US.