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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we are going to discuss the outlook for the preferred share market with TD Asset Management's James Hunter.
MoneyTalk's Anthony Okolie is going to have a look at a new TD Cowen report on the agricultural sector.
And in today's WebBroker education segment, Jason Hnatyk is going to shows how you can find more information about preferred shares here on the WebBroker platform.
Here's how you get in touch with us.
Our aim to Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get to all that and our guest of the day, let's get you an update on the markets.
We will start with the TSX Composite Index.
Some green screen on the screen. We will round that up to 32 points, a little more than 1/10 of a percent. One of the most actively traded shares at this hour include new gold.
The market is pleased by the recent guidance. The new gold shares are up to the tune of almost 11%. It's been a bit of a slide to the downside in the past couple of months for the stock. I want to check in on MEG Energy. We are getting a bit into the price of crude.
It seems to flow through to some of the energy names. At 2562 four MEG, Europe a little more than 4%.
South of the border, the Fed is headed into its Tuesday meeting. It will come out of it at 2 PM Eastern time tomorrow with a rate decision.
The market is not expecting a change in rates.
The S&P 500 is to takes to the upside.
The NASDAQ was my lead to the downside last time I checked.
A lot of tech earnings this week. Caution on that front.
Down 63 points, little shy of half a percent. General Motors today is up almost 7% right now. This is on the back of their quarterly earnings and their forecast for this year.
They feel the economy has been in it resilient in the states. Seems to bear out through the data, and so car sales will hold up. People like the sound of that.
GM is at 3775 per share. And that is your market update.
While market conversations are often dominated by talk about stocks and bonds, one area that doesn't get covered as much as preferred shares. Joining us now to discuss his view on this part of the market's James Hunter, VPN portfolio manager with TD Asset Management. Great to have you back on the show.
>> Great to be here.
>> For some people who might be new to the space, briefly remind us about preferred shares and their place as an asset class.
>> Sure. Preferred shares are a type of security that are issued typically by banks and insurance companies and they pay a dividend. Like common shares, those dividends receive tax credits here in Canada and both securities are publicly traded. But like a bond, they are a little higher in the capital structure and in exchange for that, they don't participate in the growth of the company.
They have some features that are kind of like stocks and a few features that are kind of like bonds. They are a bit of a hybrid investment.
>> When we are talking about preferred, who are we looking to in terms of issuers?
>> If you look at the market in Canada, it's a $40 billion market.
About 60% of that would be financial companies, banks, insurers and diversified financials. The next 20% would be the pipeline companies.
There is another 10% that are utilities in the last 10% is a mix of other issuers.
There is no reasonable balance in the market but it is dominated by the banks and insurance companies.
One thing to know about preferred shares is that there are three types.
There is fixed rate resets, that's about three quarters of the market. What it means is you get a fixed dividend for the first five years and then it resets every five years thereafter.
There are fixed rate perpetuals, that's where you get a fixed dividend perpetually, that's about 20% of the market. The third type is floaters, that's where the dividend floats up and down based on central bank interest rate policy, that's about 5% of the market.
>> With the market like this, breaking it down by the three different types of preferred shares, where has the activity and interest being in the market?
>> Over the past couple of years, it's been a bit of a rough ride for preferred share investors. There have been a lot of ups and downs. I think a lot of your viewers would be aware of that. The thing that really caught the market off guard has been the volatility in interest rate.
If you think about pre-COVID, interest rates are at 3%, then they were cut to zero during the pandemic, we came all the way out of that up to about 5% here in Canada. That interest rate volatility has flowed into the preferred share market.
The interest in the past couple of years, the best performance has been from floater rate preferred shares because they benefit from higher interest rates. As I mentioned, that's the smallest part of the market so most of the activity is in the rate reset market and that's had its ups and downs but the last couple of months have been a bit better.
>> The audience might think, why would I choose a preferred share over a bond?
There are differences but what sets them apart, why do some investors make that choice to say, let's be in the preferred part of the market and set a fixed income?
>> The main area that a preferred share can help your portfolio with is in terms of income.
If you think about the income of a preferred share, right now, the yield is about 6%. That's quite a bit higher than most of the parts of the market and the key in Canada is that this is tax-advantaged income. You get a tax credit.
Depending on your marginal tax rate, that could be a 6% yield after tax.
That is one interesting feature of the preferred share market which is probably a little bit better than cash and is certainly better than most bonds.
The other thing to keep in mind is that preferred shares are trading at about 20% below par which means that if the market could continue to move back towards par value in Canada, that's $25 per share, there is a capital gains opportunity.
>> Let's talk about the par value because some people might look at pure fixed income and think the opportunity this year is not only central banks on hold which they have been for several months but central banks eventually cutting. Is it the same kind of market conditions that we start to see preferred shares move back towards par?
>> Is not exactly the same but I would say the theme or the rhythm of it is pretty similar.
If you put up the chart I brought along with me, we can look at the last 10 years of the preferred share market.
I have converted the index to a weighted average per share. The par value of that is $25.
You can see how the last several years, there have been a few drawdowns in the market.
The point you will see in the chart is that the long-term averages about $22 per share and right now we are meaningfully below that, closer to $20 per share, which is the capital gains potential that I mention. To your question, I think preferred shares can move higher as interest rates come down.
The key for the preferred share market will be interest rates coming down but just not too much. If interest rates have to come down a lot, that probably means we are in a recession which would not be great for the preferred share market.
But if we get enough cuts that sort of indicate that the economy is going to muddle through a bit of a weak patch, I think that would be good for the market.
>> I wanted to ask you about risks in the space for investors thinking about preferred shares. You named one there, recession often hits many asset classes, preferreds would not be immune from that.
Any other risks when thinking about preferreds in a portfolio?
>> They two we think about our credit risk and interest rate risk. In terms of credit risk, you are talking about how secure the company's earnings are and therefore how consistently can they pay the dividend.
Preferred shareholders do not participate in the growth of the company but it's really important that they get that dividend from the issuers. We always look at credit risk.
There is a good chunk of the market that is a lower level of investment grade so that's one area that I think is of interest now because you can get some pretty good value in those parts of the market.
The other thing is of course interest rate risk. If you think about rate resets, which is three quarters of the market, there are two things to look for there.
It's when will those rate resets reset which could be this year or five years from now. The other thing to think about is how big is the spread on the securities? Some will have a spread of 100 basis points. If rates went down a lot, they don't have a lot of interest rate protection.
If there are some severities with a three or 400 basis bread, those would be more resilient as interest rates come down.
Those are the things we look at, credit risk and interest rate risk.
>> Is the market liquid?
>> Has gotten smaller in the last few years. There hasn't been new issuance since 2022. There were redemptions a couple of years ago.
The bottom line is that there were some redemptions that made the market smaller but it stabilized roughly in the last 12 months. That's a good thing because liquidity is, at times, episodic.
I guess what I would say is that there are still 200 Preferred Shares Outstanding in Canada or more, and these are high-quality issuers, the banks, the insurance companies, the big pipeline companies in Canada, some of the utilities. They are high-quality and there are still a couple hundred left so I think it's an investable opportunity still.
>> Interesting stuff and a great start to the program.
We are going to get your questions about preferred shares for James Hunter in just a moment's time.
And a reminder that you can get in touch with us any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Global shipping giant UPS says it will lay off 12,000 workers amid a slump and parcel volumes.
The company says 2023 was difficult and disappointing as revenue and operating profit fell across his business units. UPS says it aims to save $1 billion through workforce reductions.
Today, the stock is down a pretty significant 7 3/4 of a percent. Let's look at Metro. It's boosting its quarterly payout to shareholders. The grocery chain raised its dividend Bibles 11% as it reports an adjusted first-quarter profit of $1.02 per share on increased food and pharmacy sales. Metra also says it seeing strong growth at its discounted food source. The stock right now at 7026 per share, down modestly, a little more than 1%.
Shares of Celestica are on the move today.
Up about 3%. The Toronto-based tech company is reporting strong revenue growth for its enterprise business. This is part of the market when it comes to tech that artificial intelligence demand has been driving some robust growth, particulate for data centres.
In a note to clients, TD Cowen says free cash flow was also stronger-than-expected for Celestica in the quarter. 4491 per share. A quick check in on the markets. We will start your own Bay Street with the TSX Composite Index.
We've got 31 points on the table to the upside, a little more than 1/10 of a percent.
We see the price of crude oil moving higher today.
South of the border, the Fed today meeting begins today and ends tomorrow at 2 PM Eastern time. Cautious trade.
The S&P 500 is up a full point.
We are back with James Hunter from TD Asset Management, taking your questions about preferred shares. Let's get to them.
First one here. What impact you rate moves have on preferred shares?
>> That's a good question.
It's really important for preferred shares. If you think about if rates were to go up a lot, that would not be a good environment for fixed-rate perpetuals.
That's about 20% of the market. That's because they pay fixed dividends. If interest rates go up and you have the same amount of dollar dividend every year, it's relatively less attractive. The opposite of that would be floaters. If interest rates go down a lot, then your floating-rate dividend will come down with it and probably because the share price to decline.
Interest rates matter a lot and it depends on which part of the market that you are in.
>> It's been a pretty rough ride for any interest sensitive instrument or investment over the past couple of years given how aggressive the central banks of being.
We don't know the future but going forward, if we get to a place where central banks cut a little bit, we avoid a hard recession or a hard landing and light sort of gets back to normal, will there be a little more calm in the preferred sharemarket?
>> Totally. I think that would be the sweet spot for the preferred sharemarket.
If you think about it, we've exited days so very low rate environment and that's good because there is a rate reset feature. When you are resetting it lower and lower dollar amounts of dividends every five years, that's not a good environment for the asset class. If we come out of that, as we have, and we stay in a world where interest rates are higher than they used to be but they come down from where they are now, which is pretty restrictive, but just come down a little bit, I think it will be a good environment.
>> Another question from the audience.
Someone says they read that the preferred sharemarket is shrinking. Is that right?
>> Yes and no.
If you go back to 2020, 2021, there were quite a few redemptions in Canada. The reason why there were redemptions is because there was a new type of capital that was introduced. It's called a limited recourse capital no. That security, it's a substitute for the issuers of preferred shares and it's actually cheaper for those issuers.
It was very popular couple of years ago. I would tell you that it doesn't pay a dividend income. It's a different pool of buyers. It's not a substitute for retail preferred shareholders. That drove the market and made it a little bit smaller a couple of years ago but that sort of redemption activity in the preferred sharemarket really has dried up and I would say the the market at this point is pretty stable.
>> We talked about issuers in this country, whether it's banks or pipelines, still a lot of them outstanding. Do they seem to have an appetite to want to move further into the future?
Are they giving any signals to the market that they are going to be issuing more?
>> It sort of the magic question. I'd be very curious to know if the new issue market will reopen for preferred shares.
To be honest, there are not any signs of that for the time being. We haven't seen a new issue since 2022.
I think it's a point of interest for the market. I don't think it's clear that that window of opportunities is closed indefinitely. There has been a pause and we are just going to have to see more stability in interest rates and the market to see new issues.
>> Interesting stuff. Another audience question.
People are getting their questions and fast and furious.
What are your guests thoughts on fixed rate/rate reset preferred shares for the long term? Long-term holding.
>> If we are thinking about the long-term, five years or longer, I think common shares will do better and that's because they participate in the growth of the company and the growth of the economy. If you think about the banks and insurance companies in Canada, if they can continue to earn a 15% return on equity, they will probably be able to grow their earnings over time plus pay a pretty good yield.
I think for the long term, common shares will be better.
Shorter-term, like I said earlier, we do like to set up for preferred shares because you got that 6% yield, it's tax-advantaged and you got the capital gains potential. If we think about the next 12 months, I think that will be a good environment for preferreds.
>> Is that how people should think about preferreds? Not a set it and forget it investment, you're not just gonna put it there and go back in 20 years to check on it, you really have to keep your eye on it?
>> I think it depends on the individual circumstances of the investor and investment advisor. Your portfolio probably has, it should need income.
There's a rule for income in your portfolio.
Like I was describing earlier, preferred shares have very few substitutes. You just can't get a meaningful mid-single digit tax advantaged return in many places in the market. So I think it's a good spot for five or 10% of an investment portfolio. I think it makes sense.
Setting it and forgetting for the long term, you're probably better with common shares.
>> As always, make sure you do your own research before making any investment decisions.
we are going to get back to your questions for James Hunter on preferred shares in just a moment's time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get our educational segment of the day.
We are talking about preferred shares on the show.
If you would like to do more research on the space, WebBroker has tools which can help.
Jason Hnatyk, Senior client education instructor with TD Direct Investing joins us now with more. Great to see you. Talk us through it.
>> Great to be here, as always. James has done a wonderful job of laying out the argument for preferred shares and how they can help us diversify our account and maybe even like to get a little income coming our way. They can be viewed as hybrid securities with a got the income of some sort of fixed income Orbán but also the opportunity to buy and sell them like a common share. Yes, there is going to be multiple types of preferred shares which James eloquently alluded to, talking about fixed rate, perpetual rates, floating rates, even some that could be retractable or callable. WebBroker has tools that can help, so let's jump in. I want to show us how we get a quote on preferred shares but I also want to show off an interesting report that's produced on a monthly basis where we can learn more about the space.
To get more information and pull up a quote, similar to how we would pull up a common share quote. Good research at the top of the page and underinvestment, we are going to be choosing stocks.
To begin searching for a quote, we are going to be going to the search box up in the top right-hand corner. I'm going to look at Enbridge for this particular case.
What I want to highly for everybody, we got our Canadian and US common shares, and bridge itself is dual listed, but down below we've got the Enbridge preferred shares, A, C and E. They are going to have this breakdown for the different types and rates and maturity schedules.
An opportunity to dive in and get more information. Once you click on the symbol, we are going to get a quote and as James was mentioning, they typically have a par value of $25.
You can see where the price is there. If we scroll down, I want to highlight where they yield information as well is the ex dividend and payment date is.
It's gonna be on the right-hand side, just like it would be for its common share brothers, if you will. Lots of great information. We can see with preferred shares, you're typically going to have a higher yield than common but you will have to do your own research on individual issuers. Last thing about the reports I want to show off, we have to go back to the research tab at the top of the page, this time under markets, we go down and click on the reports tab.
Once we are on this particular page, that's the monthly preferred share report which we produce for all users of WebBroker.
We go ahead and launch that, lots of great information available.
We've got insights about the preferred share landscape, we got information about the different types of preferred shares as well as insight on individual issues if you continue to scroll down. Really, a wealth of information available to users and WebBroker.
>> Great resources there. Thanks for showing them off to us.
>> It's my pleasure.
>> Jason Hnatyk, Senior client education instructor with TD Direct Investing. And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we get back your questions for James Hunter on preferred shares, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Okay, we are back with James Hunter, taking your questions about preferred shares. It's proving to be a popular topic.
This question just came in. The viewer wants to know, what is your view on the potential for bank NVCC renewals on new issues. Look like banks have found alternative lower cost choices.
>> Banks have found other types of capital to issue. I mention the limited recourse capital notes earlier.
There are some institutional grade preferred shares being introduced from time to time as well.
I don't think we are going to see any more issues of retail preferred shares from the banks anytime soon. That means that that segment of the market is getting a little bit smaller.
Recently, we have seen a number of the banks reset their rate reset preferred shares to extend them for another five years, which means they remain out and issuance which is good for investors.
Another thing to keep in mind is, over the long-term, five, 10, 15 years, as these rate reset from the banks make it called, as the supply of the securities get smaller, it can be a good thing for holders of those shares. If there is less supply, then the price goes up. I think over the long run, it's still a little bit unclear with the bank's intentions are but there have been other areas for the banks to issue capital so I don't think we will see any new issues for some time.
>> Is that some of the risk to? For the preferred sharemarket, what the industry would call financial innovation. They find other tools and they say now we have this, we don't know what might be coming next.
>> I think it's a fair way to describe it but I wouldn't say it's a risk as an investor to the specific securities. The reason I say that is it's not as if the preferreds that you might owner going to go to zero. At some point, it feels good attractive enough, someone is going to step in and buy them. Particularly back in the fall, we were seeing prospective yields of eight, 9%. People will buy that eventually.
The other side of that is, if the banks call them, they get called a power, that's 25 bucks. If you own a preferred share $21 or something, you get a capital gain and it's a happy ending.
I don't think the risk but it's something to be aware of that the industry could get a little smaller and there could be less choice and liquidity.
>> Another question here.
I would like your guests thoughts on George Weston preferred a. Thanks, Jeff.
Thank you, Jeff. Good to hear from you again.
>> George Weston is a relatively small issuer. They are probably one, maybe 2% of the market. I'm pretty sure that all the preferred shares that the issue our perpetuals. The thing to keep in mind about a perpetual is that it has a fixed dividend and if interest rates for inflation were to rise unexpected lay in the next few years.
. . You are getting high yields from most preferreds on the market, around 7%. I don't know what George Weston is often help my head.
I'm pretty sure they are a perpetual. It wouldn't be our first choice as a preferred share to buy today.
Given that we are at the top of the central-bank hiking cycle, it's probably not a bad idea either.
>> As always, make sure you do your own research before making any investment decisions.
thanks to Jeff for that one. Another question now from the audience. It would do you look for when comparing preferred shares?
>> We look for a couple of things. One is definitely the credit risk.
So the credit risk on Royal Bank is a little different than the credit risk on Northland Power. There is a widespread of the market between the pricing of those to securities, just as an example, banks versus power producers.
That's one thing we look for and we will find better value in some of the lower rated securities. I think it's okay to go down the credit quality spectrum a little bit, just not too far. Don't go to something below P3, that's typically how we would approach investing in preferred shares. The other thing to look at would be again that interest rate risk.
Right now, where we are on the interest rate hike cycle, we are looking at things resetting a bit sooner or and maybe with a higher reset spread do in the event that rates and inflation are on a downward trajectory for the next year or two, you want to have a little more protection.
That's why we sort of like rate resets coming sooner.
>> AAA, AA, B, John, exclaimed to me the P3, what's the rating system?
>> In preferred shares, there's typically three categories of investment grade. P1 is the highest. There are only a couple of issuers that have that kind of reading.
PT was the second highest. That would be the equivalent of a very high triple B or really more like a low single a rated credit in the bond market.
So that would be mostly the banks and insurance companies have PTO credit ratings. Then P3, its investment grade issuers, light pipelines, some of the regulated utility companies like Altamira, they would be P3 rated credit issuers.
So solid credit, you can expect to continue to collect your dividends that you are taking just a little bit more risk than some of those other names that I mentioned earlier. What you get in return for that is usually a little bit more healed.
>> Interesting set. We don't get to talk about preferreds very often.
Do you see any credit risk for Brookfield office properties preferreds in light of the current office vacancy rate? Their yield is near 12%.
How do you start assessing a name like a Brookfield office, considering what's happening in office?
>> That's a really good question. If you think holistically about the real estate market, it's been a tough environment.
Interest rates have been straight after the last couple of years and unexpectedly straight up.. It's a difficult environment. Acute to the office sector is that many people are often working from home if not full-time but part-time, there is more flex ability, that has put some downward pressure on rents across the market.
Occupancy is still okay and some of the big cities in Canada and the US and especially with higher quality class a buildings. I wouldn't say there's a huge panic, just of the market has had to reprice a little bit sort of the credit risk. There is a little bit of credit risk with Brookfield office properties. Expect they will continue to pay their dividends and they will be able to muddle through this environment.
But investors are right to demand a little bit higher yield than they otherwise would because there is more credit risk, yes.
>> Interesting stuff there. Another question now about power. Algonquin Power.
The viewer wants to know if they are a safer bed than Algonquin equity.
Here on the platform, we cannot give investment device, declare something safer or riskier, but we can discuss the differences.
>> Algonquin Power is a diversified utility company. They have some regulated utility assets in the US, they got some power production assets across North America.
I think the approach that our research department would take on it is they do have a history of cutting their dividend.
They have a little bit more leverage than they probably should and there has been some management turnover, all of which is to say I don't think it would pass the quality threshold that we would typically look for is an investment and what that means is that it could be interesting more from the perspective of a bondholder or a preferred shareholder rather than a common shareholder. I think that Algonquin Power is still rated P3.
It is investable. But it would fall into that category like Brookfield office where there is more credit risk and it's important to make sure you are being paid to take that risk.
>> Interesting stuff. We will get back to your questions for James Hunter on preferred shares in just a moment.
As always, make sure you do your own research before making any investment decisions.
And a reminder that you can get in touch with us in any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
After surging to historic highs back in 2022, geopolitical tensions, fertilizer prices came back down to earth last year, creating a challenging market for the fertilizer industry. Anthony Okolie joins us now with a TD Cowen report on the sector. What we see in there?
>> TD Cowen did look at this industry where equities have shown weakness over the past month on average, TD Cowen spear group was down about 5% month over month.
That compares to the broader indices, the S&P 500 was up 2%, the S&P TSX up 1% month over month. Fertilizer price performance in 2023 has lagged behind the 2022 average prices.
There have been multiple factors for strong gains in 2022.
We saw the Russia Ukraine conflict and subsequent sanctions, disruptions to Black Sea trade routes and supply chain challenges. That all help to boost prices and 22.
One of the biggest reasons for the decline in prices last year, raw material inputs, including natural gas, nitrogen and ammonia were considerably cheaper last year.
None of the lesser known fact is that Western countries did not write sanction Russia or Russian agriculture products.
Notably, global potash prices from Midwest granular to China standard contract prices fell between 21 to 20% over a one-year period, according to TD Cowen.
When you take a look at potash, he spot prices were down over the past month.
Brazil granular product price was down 6% month over month.
Potash prices have been falling after shipments from Belarus and Russia resumed.
Demand for fertilizer was weaker during much of the year. Analysts have said it's as far as have waited for prices to settle down. Meanwhile, in Southeast Asia, the spot price for potash was down about 2% month over month as competitive selling and a stronger US dollar continued to weigh on prices there.
Now, regarding some raw material inputs like nitrogen for example, while prices were down and 23, we have seen a modest uptake in prices and a few markets over the past month, particularly in Egypt granular prices, also known as concentrated solid nitrogen fertilizer, the saw prices rise more than 50% last month. Meanwhile the temple ammonium prices which appreciated meaningfully during the second half of 2023 was down by 15% month over month. TD Cowen says the near-term outlook for concentrated solid nitrogen fertilizer prices appears to be firming due to a short-term squeeze on supply as well as increased interest in Europe.
>> Interesting space for investors to consider. What are some risks that could well fertilizer prices?
>> I think the volatility in prices and the demand for crop nutrients could weigh on fertilizer companies. Given the cyclical nature of the company's cash flows.
Also a spike in key raw material prices poses a headwind to fertilizer makers which could base a short-term margin pressures associated with higher input costs.
Other things such as elevated geopolitical risk could continue to impact global production and trading.
>> Interesting stuff. Thanks.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Now, for an update on the markets.
We are having a look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing.
This is the heat map function, gives us a nice picture of the market movers.
We will start the TSX 60, squeezing by Price and volume. We are seeing a bit into the price of American benchmark crude today, a little shy of $70 per barrel for WTI. Energy names are putting points on the headline number. Suncor up a little more than a full percent. Also Cameco. On oil and gas but uranium up about 1 1/3%.
In the financials, it's the big life Co.
Manulife that standing out today, a little more than 1%. In the technology bucket, Shopify down to the tune of 1.7%. US tech earnings are going to be a bonanza this week I believe starting after the close today, we will start to see what AI looks like, tech demand looks like. Should be interesting. Seven of the border, beyond the big tech earnings which everyone has on their radar as investors, the tax base is not doing all that much today. But a bit of a pullback in AMD down to the tune of about 3%.
Apple and Microsoft all under some modest pressure.
General Motors, they are taking a look at a resilient US economy as inflation comes down, perhaps financing a new car won't be quite as expensive as it has been if the bed starts cutting rates. All these things together, GM thinks it will be a decent year for auto sales. The market like what they had to say today. The stock is up about 8%.
Forgetting dragged up along, rising tide lifting all auto boats.
The big macro thing is the fed. 2 PM Eastern time tomorrow, see what they have to say about the future path of rates this year.
You can find more information on TD Advanced Dashboard by visiting TD.com/advanceddashboard.
We are back with James Hunter from TD Asset Management, we are talking preferred shares.
Here's an audience question.
When do companies redeem perpetuals, if at all?
>> That's a really good question. The answer is that they normally wouldn't. The intention of a six rate perpetual is for it to be perpetual, but they would redeem them if they could issue something else at a cheaper cost to the issuer. We have seen that before in periods where there is a lot of market enthusiasm and asset prices are high and credit spreads are particularly tight. Occasionally, we will see a company call in a perpetual, usually at par, and let's say the coupon was going to be 6% if they are able to reissue something at 5 1/2% or 5%, they will do that. It's not something we see very often.
>> Interesting stuff indeed. Let's get to another question.
We talked about some of the issuers here in Canada. A viewer wants to know, are the preferred shares be on this country?
>> There are. There are preferred shares in the US and other developed markets.
If you think in the US about the big US banks, Wells Fargo, J.P. Morgan, they have preferred shares that they issue.
What I would say is that our clients are in Canada, they are particularly interested in the tax-advantaged nature of Canadian preferred shares. So that's really where we focus our attention. We don't usually buy preferred shares in other jurisdictions, but they are not unique to Canada.
>> Here's a question… >> We saw ETF sort of be introduced in the Canadian preferred share landscape about 10 years ago and I think there about 10% of the market now.
Three ETF's are about a billion in size or more and a few others have a couple hundred million in assets. They've grown a lot. I think there's a good reason for that. They can be clunky or complex to manage if you are doing a dozen or a couple dozen lines at home but I think having an ETF is great because it gives you sort of an instantly diversified portfolio. You get different issuers, different types of credit risk and interest rate risk and you get that instant diversification. So why do you think ETF's are a really good vehicle for investing in preferred shares and they have become more popular in the Canadian market.
>> Other than the management expense ratio, are you giving up much by not using your own preferreds and just buying an ETF?
>> Well, you are more diversified, so if you see a pricing anomaly in the market and you want to just focus your investments towards a couple of those pricing anomalies, I guess he would not have as much of that opportunity in the ETF space. As you mentioned, there is a cost to ETFs. Generally, they are not superhigh management expense ratios. The other thing just keep in mind is that the liquidity in the preferred share market can be a little bit episodic.
One of the things to keep in mind is if you are buying or selling ETFs and for whatever reason you decide to transact that at a price meaningfully above or below the NAV of the ETF, you come out ahead or behind on the trade.
>> Interesting stuff. This question came in the past couple of seconds.
The viewers saying you talked about the call price. It would be useful to know the probability of this happening. How often do issuers actually call their preferreds?
>> It's a really great question and it's something I focus a lot of my time on.
It's difficult to know. To be honest, it's difficult to know.
One of the factors to consider for example with the banks is that sometimes the bank will have a lower capital ratio than it would otherwise like to have. If you are managing towards a common equity tier 1 ratio at 12% in euro 12.2%, your what we call a little bit skinny in the industry.
In that kind of environment, it's less likely that company would recall preferred shares. If they don't have the capital, calling something and for the year $400 million, that is less likely. The reverse is true. If you have a bank that has a significant amount of excess capital, 13, 14, 15%, they might want to call in their preferred shares and either have a different, lower cost funding or not have the funding source anymore because they have more capital. That's one of the things that I would point to. But the viewer is asking a really good question and I would also say that dynamic is being priced into the market. If you see a rate reset preferred share this trading close to par $25, there is a meaningful chance in the market, market expectation that that will probably be called.
Where is if there is something trading at 20 or $15 meaningfully below par, there is a market expectation that it will be… >> Obviously by the questions, some people might be new to this. What would you be looking for this year in terms of the market? Across all asset classes, it's been a pretty wild ride over the last couple of years.
>> I have been gratified to see that and other investors RTO because like I said at the top of the program, it has been a rough ride for preferred share investors and there has been more volatility than you would have expected.
However, we are still pretty constructive on it and the reason I say that is because you got that 6% tax advantaged to yield and then preferred shares are trading today or and $20 per share, it's like 20% below par. We think there is still a capital gains opportunity to capture and we think that as interest rates come down a little bit but not too much, the market will continue to recognize that opportunity and buyers will slowly come into the market. We think 2024 is going to be a better year for preferred shares.
>> Fascinating stuff. Really appreciated the conversation.
>> Happy to be here.
>> James Hunter, VP and portfolio manager at TD Asset Management. As always, make sure you do your own research before making any investment decisions. stay tuned for tomorrow show. Nicole Ewing is going to be here. She will be on the show.
Director of tax and estate planning with TD Wealth. And she is going to take your questions about tax and estate planning.
And a reminder that you can get a Headstart with your questions. Just email MoneyTalkLive@TD.com. That's all the time we have the show today. Thanks for watching and you will see you tomorrow.
[music]
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we are going to discuss the outlook for the preferred share market with TD Asset Management's James Hunter.
MoneyTalk's Anthony Okolie is going to have a look at a new TD Cowen report on the agricultural sector.
And in today's WebBroker education segment, Jason Hnatyk is going to shows how you can find more information about preferred shares here on the WebBroker platform.
Here's how you get in touch with us.
Our aim to Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get to all that and our guest of the day, let's get you an update on the markets.
We will start with the TSX Composite Index.
Some green screen on the screen. We will round that up to 32 points, a little more than 1/10 of a percent. One of the most actively traded shares at this hour include new gold.
The market is pleased by the recent guidance. The new gold shares are up to the tune of almost 11%. It's been a bit of a slide to the downside in the past couple of months for the stock. I want to check in on MEG Energy. We are getting a bit into the price of crude.
It seems to flow through to some of the energy names. At 2562 four MEG, Europe a little more than 4%.
South of the border, the Fed is headed into its Tuesday meeting. It will come out of it at 2 PM Eastern time tomorrow with a rate decision.
The market is not expecting a change in rates.
The S&P 500 is to takes to the upside.
The NASDAQ was my lead to the downside last time I checked.
A lot of tech earnings this week. Caution on that front.
Down 63 points, little shy of half a percent. General Motors today is up almost 7% right now. This is on the back of their quarterly earnings and their forecast for this year.
They feel the economy has been in it resilient in the states. Seems to bear out through the data, and so car sales will hold up. People like the sound of that.
GM is at 3775 per share. And that is your market update.
While market conversations are often dominated by talk about stocks and bonds, one area that doesn't get covered as much as preferred shares. Joining us now to discuss his view on this part of the market's James Hunter, VPN portfolio manager with TD Asset Management. Great to have you back on the show.
>> Great to be here.
>> For some people who might be new to the space, briefly remind us about preferred shares and their place as an asset class.
>> Sure. Preferred shares are a type of security that are issued typically by banks and insurance companies and they pay a dividend. Like common shares, those dividends receive tax credits here in Canada and both securities are publicly traded. But like a bond, they are a little higher in the capital structure and in exchange for that, they don't participate in the growth of the company.
They have some features that are kind of like stocks and a few features that are kind of like bonds. They are a bit of a hybrid investment.
>> When we are talking about preferred, who are we looking to in terms of issuers?
>> If you look at the market in Canada, it's a $40 billion market.
About 60% of that would be financial companies, banks, insurers and diversified financials. The next 20% would be the pipeline companies.
There is another 10% that are utilities in the last 10% is a mix of other issuers.
There is no reasonable balance in the market but it is dominated by the banks and insurance companies.
One thing to know about preferred shares is that there are three types.
There is fixed rate resets, that's about three quarters of the market. What it means is you get a fixed dividend for the first five years and then it resets every five years thereafter.
There are fixed rate perpetuals, that's where you get a fixed dividend perpetually, that's about 20% of the market. The third type is floaters, that's where the dividend floats up and down based on central bank interest rate policy, that's about 5% of the market.
>> With the market like this, breaking it down by the three different types of preferred shares, where has the activity and interest being in the market?
>> Over the past couple of years, it's been a bit of a rough ride for preferred share investors. There have been a lot of ups and downs. I think a lot of your viewers would be aware of that. The thing that really caught the market off guard has been the volatility in interest rate.
If you think about pre-COVID, interest rates are at 3%, then they were cut to zero during the pandemic, we came all the way out of that up to about 5% here in Canada. That interest rate volatility has flowed into the preferred share market.
The interest in the past couple of years, the best performance has been from floater rate preferred shares because they benefit from higher interest rates. As I mentioned, that's the smallest part of the market so most of the activity is in the rate reset market and that's had its ups and downs but the last couple of months have been a bit better.
>> The audience might think, why would I choose a preferred share over a bond?
There are differences but what sets them apart, why do some investors make that choice to say, let's be in the preferred part of the market and set a fixed income?
>> The main area that a preferred share can help your portfolio with is in terms of income.
If you think about the income of a preferred share, right now, the yield is about 6%. That's quite a bit higher than most of the parts of the market and the key in Canada is that this is tax-advantaged income. You get a tax credit.
Depending on your marginal tax rate, that could be a 6% yield after tax.
That is one interesting feature of the preferred share market which is probably a little bit better than cash and is certainly better than most bonds.
The other thing to keep in mind is that preferred shares are trading at about 20% below par which means that if the market could continue to move back towards par value in Canada, that's $25 per share, there is a capital gains opportunity.
>> Let's talk about the par value because some people might look at pure fixed income and think the opportunity this year is not only central banks on hold which they have been for several months but central banks eventually cutting. Is it the same kind of market conditions that we start to see preferred shares move back towards par?
>> Is not exactly the same but I would say the theme or the rhythm of it is pretty similar.
If you put up the chart I brought along with me, we can look at the last 10 years of the preferred share market.
I have converted the index to a weighted average per share. The par value of that is $25.
You can see how the last several years, there have been a few drawdowns in the market.
The point you will see in the chart is that the long-term averages about $22 per share and right now we are meaningfully below that, closer to $20 per share, which is the capital gains potential that I mention. To your question, I think preferred shares can move higher as interest rates come down.
The key for the preferred share market will be interest rates coming down but just not too much. If interest rates have to come down a lot, that probably means we are in a recession which would not be great for the preferred share market.
But if we get enough cuts that sort of indicate that the economy is going to muddle through a bit of a weak patch, I think that would be good for the market.
>> I wanted to ask you about risks in the space for investors thinking about preferred shares. You named one there, recession often hits many asset classes, preferreds would not be immune from that.
Any other risks when thinking about preferreds in a portfolio?
>> They two we think about our credit risk and interest rate risk. In terms of credit risk, you are talking about how secure the company's earnings are and therefore how consistently can they pay the dividend.
Preferred shareholders do not participate in the growth of the company but it's really important that they get that dividend from the issuers. We always look at credit risk.
There is a good chunk of the market that is a lower level of investment grade so that's one area that I think is of interest now because you can get some pretty good value in those parts of the market.
The other thing is of course interest rate risk. If you think about rate resets, which is three quarters of the market, there are two things to look for there.
It's when will those rate resets reset which could be this year or five years from now. The other thing to think about is how big is the spread on the securities? Some will have a spread of 100 basis points. If rates went down a lot, they don't have a lot of interest rate protection.
If there are some severities with a three or 400 basis bread, those would be more resilient as interest rates come down.
Those are the things we look at, credit risk and interest rate risk.
>> Is the market liquid?
>> Has gotten smaller in the last few years. There hasn't been new issuance since 2022. There were redemptions a couple of years ago.
The bottom line is that there were some redemptions that made the market smaller but it stabilized roughly in the last 12 months. That's a good thing because liquidity is, at times, episodic.
I guess what I would say is that there are still 200 Preferred Shares Outstanding in Canada or more, and these are high-quality issuers, the banks, the insurance companies, the big pipeline companies in Canada, some of the utilities. They are high-quality and there are still a couple hundred left so I think it's an investable opportunity still.
>> Interesting stuff and a great start to the program.
We are going to get your questions about preferred shares for James Hunter in just a moment's time.
And a reminder that you can get in touch with us any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
Global shipping giant UPS says it will lay off 12,000 workers amid a slump and parcel volumes.
The company says 2023 was difficult and disappointing as revenue and operating profit fell across his business units. UPS says it aims to save $1 billion through workforce reductions.
Today, the stock is down a pretty significant 7 3/4 of a percent. Let's look at Metro. It's boosting its quarterly payout to shareholders. The grocery chain raised its dividend Bibles 11% as it reports an adjusted first-quarter profit of $1.02 per share on increased food and pharmacy sales. Metra also says it seeing strong growth at its discounted food source. The stock right now at 7026 per share, down modestly, a little more than 1%.
Shares of Celestica are on the move today.
Up about 3%. The Toronto-based tech company is reporting strong revenue growth for its enterprise business. This is part of the market when it comes to tech that artificial intelligence demand has been driving some robust growth, particulate for data centres.
In a note to clients, TD Cowen says free cash flow was also stronger-than-expected for Celestica in the quarter. 4491 per share. A quick check in on the markets. We will start your own Bay Street with the TSX Composite Index.
We've got 31 points on the table to the upside, a little more than 1/10 of a percent.
We see the price of crude oil moving higher today.
South of the border, the Fed today meeting begins today and ends tomorrow at 2 PM Eastern time. Cautious trade.
The S&P 500 is up a full point.
We are back with James Hunter from TD Asset Management, taking your questions about preferred shares. Let's get to them.
First one here. What impact you rate moves have on preferred shares?
>> That's a good question.
It's really important for preferred shares. If you think about if rates were to go up a lot, that would not be a good environment for fixed-rate perpetuals.
That's about 20% of the market. That's because they pay fixed dividends. If interest rates go up and you have the same amount of dollar dividend every year, it's relatively less attractive. The opposite of that would be floaters. If interest rates go down a lot, then your floating-rate dividend will come down with it and probably because the share price to decline.
Interest rates matter a lot and it depends on which part of the market that you are in.
>> It's been a pretty rough ride for any interest sensitive instrument or investment over the past couple of years given how aggressive the central banks of being.
We don't know the future but going forward, if we get to a place where central banks cut a little bit, we avoid a hard recession or a hard landing and light sort of gets back to normal, will there be a little more calm in the preferred sharemarket?
>> Totally. I think that would be the sweet spot for the preferred sharemarket.
If you think about it, we've exited days so very low rate environment and that's good because there is a rate reset feature. When you are resetting it lower and lower dollar amounts of dividends every five years, that's not a good environment for the asset class. If we come out of that, as we have, and we stay in a world where interest rates are higher than they used to be but they come down from where they are now, which is pretty restrictive, but just come down a little bit, I think it will be a good environment.
>> Another question from the audience.
Someone says they read that the preferred sharemarket is shrinking. Is that right?
>> Yes and no.
If you go back to 2020, 2021, there were quite a few redemptions in Canada. The reason why there were redemptions is because there was a new type of capital that was introduced. It's called a limited recourse capital no. That security, it's a substitute for the issuers of preferred shares and it's actually cheaper for those issuers.
It was very popular couple of years ago. I would tell you that it doesn't pay a dividend income. It's a different pool of buyers. It's not a substitute for retail preferred shareholders. That drove the market and made it a little bit smaller a couple of years ago but that sort of redemption activity in the preferred sharemarket really has dried up and I would say the the market at this point is pretty stable.
>> We talked about issuers in this country, whether it's banks or pipelines, still a lot of them outstanding. Do they seem to have an appetite to want to move further into the future?
Are they giving any signals to the market that they are going to be issuing more?
>> It sort of the magic question. I'd be very curious to know if the new issue market will reopen for preferred shares.
To be honest, there are not any signs of that for the time being. We haven't seen a new issue since 2022.
I think it's a point of interest for the market. I don't think it's clear that that window of opportunities is closed indefinitely. There has been a pause and we are just going to have to see more stability in interest rates and the market to see new issues.
>> Interesting stuff. Another audience question.
People are getting their questions and fast and furious.
What are your guests thoughts on fixed rate/rate reset preferred shares for the long term? Long-term holding.
>> If we are thinking about the long-term, five years or longer, I think common shares will do better and that's because they participate in the growth of the company and the growth of the economy. If you think about the banks and insurance companies in Canada, if they can continue to earn a 15% return on equity, they will probably be able to grow their earnings over time plus pay a pretty good yield.
I think for the long term, common shares will be better.
Shorter-term, like I said earlier, we do like to set up for preferred shares because you got that 6% yield, it's tax-advantaged and you got the capital gains potential. If we think about the next 12 months, I think that will be a good environment for preferreds.
>> Is that how people should think about preferreds? Not a set it and forget it investment, you're not just gonna put it there and go back in 20 years to check on it, you really have to keep your eye on it?
>> I think it depends on the individual circumstances of the investor and investment advisor. Your portfolio probably has, it should need income.
There's a rule for income in your portfolio.
Like I was describing earlier, preferred shares have very few substitutes. You just can't get a meaningful mid-single digit tax advantaged return in many places in the market. So I think it's a good spot for five or 10% of an investment portfolio. I think it makes sense.
Setting it and forgetting for the long term, you're probably better with common shares.
>> As always, make sure you do your own research before making any investment decisions.
we are going to get back to your questions for James Hunter on preferred shares in just a moment's time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get our educational segment of the day.
We are talking about preferred shares on the show.
If you would like to do more research on the space, WebBroker has tools which can help.
Jason Hnatyk, Senior client education instructor with TD Direct Investing joins us now with more. Great to see you. Talk us through it.
>> Great to be here, as always. James has done a wonderful job of laying out the argument for preferred shares and how they can help us diversify our account and maybe even like to get a little income coming our way. They can be viewed as hybrid securities with a got the income of some sort of fixed income Orbán but also the opportunity to buy and sell them like a common share. Yes, there is going to be multiple types of preferred shares which James eloquently alluded to, talking about fixed rate, perpetual rates, floating rates, even some that could be retractable or callable. WebBroker has tools that can help, so let's jump in. I want to show us how we get a quote on preferred shares but I also want to show off an interesting report that's produced on a monthly basis where we can learn more about the space.
To get more information and pull up a quote, similar to how we would pull up a common share quote. Good research at the top of the page and underinvestment, we are going to be choosing stocks.
To begin searching for a quote, we are going to be going to the search box up in the top right-hand corner. I'm going to look at Enbridge for this particular case.
What I want to highly for everybody, we got our Canadian and US common shares, and bridge itself is dual listed, but down below we've got the Enbridge preferred shares, A, C and E. They are going to have this breakdown for the different types and rates and maturity schedules.
An opportunity to dive in and get more information. Once you click on the symbol, we are going to get a quote and as James was mentioning, they typically have a par value of $25.
You can see where the price is there. If we scroll down, I want to highlight where they yield information as well is the ex dividend and payment date is.
It's gonna be on the right-hand side, just like it would be for its common share brothers, if you will. Lots of great information. We can see with preferred shares, you're typically going to have a higher yield than common but you will have to do your own research on individual issuers. Last thing about the reports I want to show off, we have to go back to the research tab at the top of the page, this time under markets, we go down and click on the reports tab.
Once we are on this particular page, that's the monthly preferred share report which we produce for all users of WebBroker.
We go ahead and launch that, lots of great information available.
We've got insights about the preferred share landscape, we got information about the different types of preferred shares as well as insight on individual issues if you continue to scroll down. Really, a wealth of information available to users and WebBroker.
>> Great resources there. Thanks for showing them off to us.
>> It's my pleasure.
>> Jason Hnatyk, Senior client education instructor with TD Direct Investing. And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we get back your questions for James Hunter on preferred shares, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets? Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Okay, we are back with James Hunter, taking your questions about preferred shares. It's proving to be a popular topic.
This question just came in. The viewer wants to know, what is your view on the potential for bank NVCC renewals on new issues. Look like banks have found alternative lower cost choices.
>> Banks have found other types of capital to issue. I mention the limited recourse capital notes earlier.
There are some institutional grade preferred shares being introduced from time to time as well.
I don't think we are going to see any more issues of retail preferred shares from the banks anytime soon. That means that that segment of the market is getting a little bit smaller.
Recently, we have seen a number of the banks reset their rate reset preferred shares to extend them for another five years, which means they remain out and issuance which is good for investors.
Another thing to keep in mind is, over the long-term, five, 10, 15 years, as these rate reset from the banks make it called, as the supply of the securities get smaller, it can be a good thing for holders of those shares. If there is less supply, then the price goes up. I think over the long run, it's still a little bit unclear with the bank's intentions are but there have been other areas for the banks to issue capital so I don't think we will see any new issues for some time.
>> Is that some of the risk to? For the preferred sharemarket, what the industry would call financial innovation. They find other tools and they say now we have this, we don't know what might be coming next.
>> I think it's a fair way to describe it but I wouldn't say it's a risk as an investor to the specific securities. The reason I say that is it's not as if the preferreds that you might owner going to go to zero. At some point, it feels good attractive enough, someone is going to step in and buy them. Particularly back in the fall, we were seeing prospective yields of eight, 9%. People will buy that eventually.
The other side of that is, if the banks call them, they get called a power, that's 25 bucks. If you own a preferred share $21 or something, you get a capital gain and it's a happy ending.
I don't think the risk but it's something to be aware of that the industry could get a little smaller and there could be less choice and liquidity.
>> Another question here.
I would like your guests thoughts on George Weston preferred a. Thanks, Jeff.
Thank you, Jeff. Good to hear from you again.
>> George Weston is a relatively small issuer. They are probably one, maybe 2% of the market. I'm pretty sure that all the preferred shares that the issue our perpetuals. The thing to keep in mind about a perpetual is that it has a fixed dividend and if interest rates for inflation were to rise unexpected lay in the next few years.
. . You are getting high yields from most preferreds on the market, around 7%. I don't know what George Weston is often help my head.
I'm pretty sure they are a perpetual. It wouldn't be our first choice as a preferred share to buy today.
Given that we are at the top of the central-bank hiking cycle, it's probably not a bad idea either.
>> As always, make sure you do your own research before making any investment decisions.
thanks to Jeff for that one. Another question now from the audience. It would do you look for when comparing preferred shares?
>> We look for a couple of things. One is definitely the credit risk.
So the credit risk on Royal Bank is a little different than the credit risk on Northland Power. There is a widespread of the market between the pricing of those to securities, just as an example, banks versus power producers.
That's one thing we look for and we will find better value in some of the lower rated securities. I think it's okay to go down the credit quality spectrum a little bit, just not too far. Don't go to something below P3, that's typically how we would approach investing in preferred shares. The other thing to look at would be again that interest rate risk.
Right now, where we are on the interest rate hike cycle, we are looking at things resetting a bit sooner or and maybe with a higher reset spread do in the event that rates and inflation are on a downward trajectory for the next year or two, you want to have a little more protection.
That's why we sort of like rate resets coming sooner.
>> AAA, AA, B, John, exclaimed to me the P3, what's the rating system?
>> In preferred shares, there's typically three categories of investment grade. P1 is the highest. There are only a couple of issuers that have that kind of reading.
PT was the second highest. That would be the equivalent of a very high triple B or really more like a low single a rated credit in the bond market.
So that would be mostly the banks and insurance companies have PTO credit ratings. Then P3, its investment grade issuers, light pipelines, some of the regulated utility companies like Altamira, they would be P3 rated credit issuers.
So solid credit, you can expect to continue to collect your dividends that you are taking just a little bit more risk than some of those other names that I mentioned earlier. What you get in return for that is usually a little bit more healed.
>> Interesting set. We don't get to talk about preferreds very often.
Do you see any credit risk for Brookfield office properties preferreds in light of the current office vacancy rate? Their yield is near 12%.
How do you start assessing a name like a Brookfield office, considering what's happening in office?
>> That's a really good question. If you think holistically about the real estate market, it's been a tough environment.
Interest rates have been straight after the last couple of years and unexpectedly straight up.. It's a difficult environment. Acute to the office sector is that many people are often working from home if not full-time but part-time, there is more flex ability, that has put some downward pressure on rents across the market.
Occupancy is still okay and some of the big cities in Canada and the US and especially with higher quality class a buildings. I wouldn't say there's a huge panic, just of the market has had to reprice a little bit sort of the credit risk. There is a little bit of credit risk with Brookfield office properties. Expect they will continue to pay their dividends and they will be able to muddle through this environment.
But investors are right to demand a little bit higher yield than they otherwise would because there is more credit risk, yes.
>> Interesting stuff there. Another question now about power. Algonquin Power.
The viewer wants to know if they are a safer bed than Algonquin equity.
Here on the platform, we cannot give investment device, declare something safer or riskier, but we can discuss the differences.
>> Algonquin Power is a diversified utility company. They have some regulated utility assets in the US, they got some power production assets across North America.
I think the approach that our research department would take on it is they do have a history of cutting their dividend.
They have a little bit more leverage than they probably should and there has been some management turnover, all of which is to say I don't think it would pass the quality threshold that we would typically look for is an investment and what that means is that it could be interesting more from the perspective of a bondholder or a preferred shareholder rather than a common shareholder. I think that Algonquin Power is still rated P3.
It is investable. But it would fall into that category like Brookfield office where there is more credit risk and it's important to make sure you are being paid to take that risk.
>> Interesting stuff. We will get back to your questions for James Hunter on preferred shares in just a moment.
As always, make sure you do your own research before making any investment decisions.
And a reminder that you can get in touch with us in any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
After surging to historic highs back in 2022, geopolitical tensions, fertilizer prices came back down to earth last year, creating a challenging market for the fertilizer industry. Anthony Okolie joins us now with a TD Cowen report on the sector. What we see in there?
>> TD Cowen did look at this industry where equities have shown weakness over the past month on average, TD Cowen spear group was down about 5% month over month.
That compares to the broader indices, the S&P 500 was up 2%, the S&P TSX up 1% month over month. Fertilizer price performance in 2023 has lagged behind the 2022 average prices.
There have been multiple factors for strong gains in 2022.
We saw the Russia Ukraine conflict and subsequent sanctions, disruptions to Black Sea trade routes and supply chain challenges. That all help to boost prices and 22.
One of the biggest reasons for the decline in prices last year, raw material inputs, including natural gas, nitrogen and ammonia were considerably cheaper last year.
None of the lesser known fact is that Western countries did not write sanction Russia or Russian agriculture products.
Notably, global potash prices from Midwest granular to China standard contract prices fell between 21 to 20% over a one-year period, according to TD Cowen.
When you take a look at potash, he spot prices were down over the past month.
Brazil granular product price was down 6% month over month.
Potash prices have been falling after shipments from Belarus and Russia resumed.
Demand for fertilizer was weaker during much of the year. Analysts have said it's as far as have waited for prices to settle down. Meanwhile, in Southeast Asia, the spot price for potash was down about 2% month over month as competitive selling and a stronger US dollar continued to weigh on prices there.
Now, regarding some raw material inputs like nitrogen for example, while prices were down and 23, we have seen a modest uptake in prices and a few markets over the past month, particularly in Egypt granular prices, also known as concentrated solid nitrogen fertilizer, the saw prices rise more than 50% last month. Meanwhile the temple ammonium prices which appreciated meaningfully during the second half of 2023 was down by 15% month over month. TD Cowen says the near-term outlook for concentrated solid nitrogen fertilizer prices appears to be firming due to a short-term squeeze on supply as well as increased interest in Europe.
>> Interesting space for investors to consider. What are some risks that could well fertilizer prices?
>> I think the volatility in prices and the demand for crop nutrients could weigh on fertilizer companies. Given the cyclical nature of the company's cash flows.
Also a spike in key raw material prices poses a headwind to fertilizer makers which could base a short-term margin pressures associated with higher input costs.
Other things such as elevated geopolitical risk could continue to impact global production and trading.
>> Interesting stuff. Thanks.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Now, for an update on the markets.
We are having a look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing.
This is the heat map function, gives us a nice picture of the market movers.
We will start the TSX 60, squeezing by Price and volume. We are seeing a bit into the price of American benchmark crude today, a little shy of $70 per barrel for WTI. Energy names are putting points on the headline number. Suncor up a little more than a full percent. Also Cameco. On oil and gas but uranium up about 1 1/3%.
In the financials, it's the big life Co.
Manulife that standing out today, a little more than 1%. In the technology bucket, Shopify down to the tune of 1.7%. US tech earnings are going to be a bonanza this week I believe starting after the close today, we will start to see what AI looks like, tech demand looks like. Should be interesting. Seven of the border, beyond the big tech earnings which everyone has on their radar as investors, the tax base is not doing all that much today. But a bit of a pullback in AMD down to the tune of about 3%.
Apple and Microsoft all under some modest pressure.
General Motors, they are taking a look at a resilient US economy as inflation comes down, perhaps financing a new car won't be quite as expensive as it has been if the bed starts cutting rates. All these things together, GM thinks it will be a decent year for auto sales. The market like what they had to say today. The stock is up about 8%.
Forgetting dragged up along, rising tide lifting all auto boats.
The big macro thing is the fed. 2 PM Eastern time tomorrow, see what they have to say about the future path of rates this year.
You can find more information on TD Advanced Dashboard by visiting TD.com/advanceddashboard.
We are back with James Hunter from TD Asset Management, we are talking preferred shares.
Here's an audience question.
When do companies redeem perpetuals, if at all?
>> That's a really good question. The answer is that they normally wouldn't. The intention of a six rate perpetual is for it to be perpetual, but they would redeem them if they could issue something else at a cheaper cost to the issuer. We have seen that before in periods where there is a lot of market enthusiasm and asset prices are high and credit spreads are particularly tight. Occasionally, we will see a company call in a perpetual, usually at par, and let's say the coupon was going to be 6% if they are able to reissue something at 5 1/2% or 5%, they will do that. It's not something we see very often.
>> Interesting stuff indeed. Let's get to another question.
We talked about some of the issuers here in Canada. A viewer wants to know, are the preferred shares be on this country?
>> There are. There are preferred shares in the US and other developed markets.
If you think in the US about the big US banks, Wells Fargo, J.P. Morgan, they have preferred shares that they issue.
What I would say is that our clients are in Canada, they are particularly interested in the tax-advantaged nature of Canadian preferred shares. So that's really where we focus our attention. We don't usually buy preferred shares in other jurisdictions, but they are not unique to Canada.
>> Here's a question… >> We saw ETF sort of be introduced in the Canadian preferred share landscape about 10 years ago and I think there about 10% of the market now.
Three ETF's are about a billion in size or more and a few others have a couple hundred million in assets. They've grown a lot. I think there's a good reason for that. They can be clunky or complex to manage if you are doing a dozen or a couple dozen lines at home but I think having an ETF is great because it gives you sort of an instantly diversified portfolio. You get different issuers, different types of credit risk and interest rate risk and you get that instant diversification. So why do you think ETF's are a really good vehicle for investing in preferred shares and they have become more popular in the Canadian market.
>> Other than the management expense ratio, are you giving up much by not using your own preferreds and just buying an ETF?
>> Well, you are more diversified, so if you see a pricing anomaly in the market and you want to just focus your investments towards a couple of those pricing anomalies, I guess he would not have as much of that opportunity in the ETF space. As you mentioned, there is a cost to ETFs. Generally, they are not superhigh management expense ratios. The other thing just keep in mind is that the liquidity in the preferred share market can be a little bit episodic.
One of the things to keep in mind is if you are buying or selling ETFs and for whatever reason you decide to transact that at a price meaningfully above or below the NAV of the ETF, you come out ahead or behind on the trade.
>> Interesting stuff. This question came in the past couple of seconds.
The viewers saying you talked about the call price. It would be useful to know the probability of this happening. How often do issuers actually call their preferreds?
>> It's a really great question and it's something I focus a lot of my time on.
It's difficult to know. To be honest, it's difficult to know.
One of the factors to consider for example with the banks is that sometimes the bank will have a lower capital ratio than it would otherwise like to have. If you are managing towards a common equity tier 1 ratio at 12% in euro 12.2%, your what we call a little bit skinny in the industry.
In that kind of environment, it's less likely that company would recall preferred shares. If they don't have the capital, calling something and for the year $400 million, that is less likely. The reverse is true. If you have a bank that has a significant amount of excess capital, 13, 14, 15%, they might want to call in their preferred shares and either have a different, lower cost funding or not have the funding source anymore because they have more capital. That's one of the things that I would point to. But the viewer is asking a really good question and I would also say that dynamic is being priced into the market. If you see a rate reset preferred share this trading close to par $25, there is a meaningful chance in the market, market expectation that that will probably be called.
Where is if there is something trading at 20 or $15 meaningfully below par, there is a market expectation that it will be… >> Obviously by the questions, some people might be new to this. What would you be looking for this year in terms of the market? Across all asset classes, it's been a pretty wild ride over the last couple of years.
>> I have been gratified to see that and other investors RTO because like I said at the top of the program, it has been a rough ride for preferred share investors and there has been more volatility than you would have expected.
However, we are still pretty constructive on it and the reason I say that is because you got that 6% tax advantaged to yield and then preferred shares are trading today or and $20 per share, it's like 20% below par. We think there is still a capital gains opportunity to capture and we think that as interest rates come down a little bit but not too much, the market will continue to recognize that opportunity and buyers will slowly come into the market. We think 2024 is going to be a better year for preferred shares.
>> Fascinating stuff. Really appreciated the conversation.
>> Happy to be here.
>> James Hunter, VP and portfolio manager at TD Asset Management. As always, make sure you do your own research before making any investment decisions. stay tuned for tomorrow show. Nicole Ewing is going to be here. She will be on the show.
Director of tax and estate planning with TD Wealth. And she is going to take your questions about tax and estate planning.
And a reminder that you can get a Headstart with your questions. Just email MoneyTalkLive@TD.com. That's all the time we have the show today. Thanks for watching and you will see you tomorrow.
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