Canadian Mining Companies - Is now a good time to buy?

Last week's look at the environmental, social and governance aspects of Canada's largest mining companies found most to be taking such matters seriously. It's a good start but an investor wants to know whether there is money to be made. How are they faring financially and is now a good time to buy shares?

A cyclical industry that is currently out of market favour
Mining, whether of gold, silver, uranium, base metals or fertilizers, is highly cyclical. It is dependent for profits on the big swings in prices of those commodities. Whether for different reasons amongst the different products, currently the whole mining industry seems to be in a down cycle and out of favour in stock markets. The graph below shows the big decline in prices of such stocks, using the example of a few of the companies in our list and a popular ETF that holds a basket of such stocks, iShares S&P/TSX Capped Materials Index Fund (TSX symbol: XMA). Compared to the overall TSX index, which has been relatively flat, the Google Finance chart shows the miners' poor performance for almost three years, since the end of 2010.

Financial stability - some are faring ok, some are hurting
If prices of metals and minerals are down and compressing profits, a company needs to have a low cost structure and sustainable levels of debt. Our table shows good numbers in green and bad in red.

In the two debt columns, we see some bad performers:

• Barrick Gold (ABX) has a very high level of debt in relation to equity on its balance sheet, much higher than any other company. A recent Globe Advisor column discusses how this makes Barrick very exposed to any further decline in the price of gold. On the other hand, any rise will boost shareholder gains faster. Debt, aka leverage, is a double edged sword. The company is already taking action to curtail the large recent net losses. 
• Newmont (NMC), Tahoe (THO) and Turquoise Hill (TRQ) have lots of debt in relation to the cash flow being generated and this is reflected in net losses.
• Goldcorp (G) and Kinross (K) display negative operating margins (operating income divided by sales) i.e. losses from operations that does not include interest or taxes. Both are experiencing substantial net losses, though Kinross is a lot worse off. Until the latest 12 months, Goldcorp had managed to make profits every calendar year. Goldcorp has just reported more problems with its operations and costs. Kinross has had recurring trouble with only four years with profits out of the last seven.

And there are some companies that look good too, with reasonable debt loads, healthy operating margins, consistent profitability, even in current conditions:

• Agnico Eagle Mines (AEM), Agrium (AGU), Cameco Corp, Eldorado (ELD), First Quantum (FM), Lundin Mining (LUN), Potash Corp (POT), Teck Resources (TCK.B) and Yamana Gold (YLD)

Value - whether stock price is a cheap not an easy thing to assess!

The classic value method of looking at a company starts with looking for a low Price to Earnings ratio (P/E) but with mining, whose earnings can vary tremendously with the price of their gold, silver etc, a P/E may be lowest at the peak of the cycle when the earnings denominator is highest. Conversely, a high P/E may happen at the bottom of the cycle, when earnings are really low and the expectation of better future results justifies a higher price. That may be the case today, where we seem to be more at the bottom than the top of a cycle. Agnico Eagle's P/E of 27.4 may reflect more future earnings growth expectations than over-enthusiastic pricing. Yesterday's huge 17% price jump by Agnico, despite falling profits year over year, suggests expectations are at work.

Price-to-Book may give a better indication of value for more mature companies

Using a company's book value of its assets, which does not change constantly with commodity prices, may help provide perspective, especially where a company has been in business for many years, through several commodity price cycles. Our comparison table above shows in green the companies whose current P/B ratio is either very low at 1.0 or below, or is at the lowest end of the historical price range. On that basis, almost all the stocks appear to be quite cheap and only one - Tahoe Resources - looks expensive.

The whiff of changing sentiment 

Possibly the winds are changing, or at least for some miners. Thursday's quarterly results from Teck were down from the previous year but better than analyst forecasts, which prompted a 3.8% rise in the stock price and a Globe article announcing that mining stocks are on the mend.

Potash facing a new normal of a broken cartel

Potash producers Potash Corp and Agrium face a different future, brought about when Russian producer Uralkali announced on July 30 its withdrawal from the potash selling cartel. Though Potash Corp is still very profitable, it's results are down and it has lost its market darling status of the last many years. The big question for investors is whether this will continue as the new normal, or whether basic demand for fertilizer will restore previous profitability. Agrium is less affected by the potash price drops resulting from the cartel breakup since potash makes up less of its product mix.

Bottom Line - several worth buying, some not

We have sorted our comparison table from the best at the top down through slightly less attractive but reasonable choices based on the information we have compiled. The promising choice list comprises ten companies.

At the bottom of the table, below the blank line, are the six stocks with too much red for our taste. Before making a purchase we would want to read more annual and quarterly reports of the ten good-looking companies, along with analyst commentary to see if there are other problems we have not yet uncovered that are particular to a company that would prevent it from rising in the upward cycle.

Disclosure: this blogger directly owns shares of Potash Corp, and Teck Resources apart from holding virtually all the companies in various ETFs.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Canadian Mining Companies - How do they rate on Sustainability, Environmental, Social and Governance issues?

Many investors cast an interested eye on how well their potential purchases perform beyond purely financial factors - they want to know whether a company is adhering to a higher standard than mere conformance to the law with respect to environmental protection, treatment of communities where the company operates, inclusiveness from the bottom workers to the upper reaches of the boardroom and worker safety. At the same time, companies are recognizing that their long term future sustainability depends on retaining a social mandate to operate. Such considerations are given the term Socially Responsible Investing (SRI), or Environmental, Social and Governance factors (ESG), or simply Sustainability.

Previously we have looked through this lens at Canadian Oil and Gas stocks and Consumer stocks. It is easy to also imagine that Sustainability would concern the mining industry, as the big employer in many small communities undertaking dangerous work with a huge potential impact on the physical environment. And as we noted in the previous posts, it is worthwhile for investors to pay attention. The paper The Added Value of ESG/SRI on Company and Portfolio Levels – What Can We Learn From Research? reviews the literature and finds a positive relationship between company financial performance and the adoption of Sustainable practices. In another paper, The Impact of Corporate Sustainability on Organizational Processes and Performance, Harvard Business School researchers Robert Eccles, Ioannis Ioannou and George Serafeim found that SRI/ESG adopters outperformed both in stock market and accounting terms. Moreover, "The outperformance is stronger in sectors where the ... products significantly depend upon extracting large amounts of natural resources ...".

Finding the stocks
As before we used the TMX Money Stock Screener and picked the metals and mining industry, taking the largest companies by market cap. Then we added two fertilizer miners, Potash Corp and Agrium Inc. Three companies - Silver Wheaton, Franco-Nevada and Royal Gold - were eliminated since they do not operate mines, only invest in others to pay out income streams or royalties to investors. The remaining list of 17 companies comprises eight gold producers, two uranium producers, four multi-metal miners, one silver miner and the two fertilizer producers.

The ESG Criteria
The first three critical assessment factors are taken from the above-cited Harvard article. To get the answers in the table we had to do a lot of digging through each company's website and in its annual Management Information Circular (aka the Proxy Circular on the regulator Sedar.com website where the official version is always to be found when it is not on the company website):

• Board Committee dedicated to Sustainability - The involvement of the highest level of the company ensures real action and commitment.
• Executive compensation tied to Sustainability - Linking executives' pay to results is the next step towards results.
• Formal stakeholder engagement processes are in place - The existence of mechanisms like surveys, focus groups and audits, to engage with suppliers, with customers, with employees, with the communities where they operate reduces risk and improves adaptability of the companies. We looked for evidence of planned, pro-active, focussed programs seeking feedback and involvement, not merely unidirectional "spreading the company word" outward communications.

We have added several other criteria to the list:

• Stock selected by the iShares Jantzi Social Index® Fund  (TSX symbol: XEN) - It's a plus if the company has been evaluated as conforming to "... a higher standard of environmental and social performance" and is in the XEN portfolio.
• Rating in the Board Shareholder Confidence Index of the Clarkson Centre for Business Ethics and Board Effectiveness - This helps us know whether the company's board of directors adheres to best practices for corporate governance. C is the lowest / worst and AAA+ is the best.
• Number of women on the board - As we wrote about here and here, it is an advantage for companies to have women directors. This is a hot topic in governance these days - see the Financial Post's recent article here and the Ontario Securities Commission's request for comments on whether and what it should force companies to do.
• Recognition, awards, disclosure practices and reports, standards pursued relating to ESG action or achievements by the companies - We have highlighted in green text what look to be the most exacting norms according to the Canadian Business for Social Responsibility, which is a non-profit organization promoting corporate social and environmental sustainability in Canada. The chart below comes from its CSR Frameworks Review for the Extractive Industry.

• For those who may wish to look at the details, here are the sources:
  Extractive Industries Transparency Initiative (EITI)
  Clarkson Centre for Business Ethics and Board Effectiveness
  Corporate Knights Global 100
  Corporate Knights 2013 Best Corporate Citizens Canada
  Corporate Knights 2012 Top 10 Canadian Mining Companies
  Global Reporting Initiative (GRI)
  Dow Jones Sustainability Index (DJSI) - usually gleaned only from the company's own website since the index provider only reveals constituent companies to paying customers
  Carbon Disclosure Project (CDP)
  Business for Social Responsibility (BSR) - different from the CBSR
  International Cyanide Management Code (ICMC)
  International Council on Mining and Metals (ICMM)
  Mining Association of Canada member, which includes mandatory Towards Sustainable Mining (TSM) participation

Who's the greenest of them all?

Green is good and the more green in our comparison table below the better. We have roughly sorted the table putting the best at the top.

Big Canadian mining companies generally take Sustainability seriously - There is a lot of green in our table. Except for the bottom three or so, every company is evidently devoting a lot of board and executive management time and effort to ESG and the results are visible to external ratings organizations. Comparing the results of our previous examinations of Consumer and Oil and Gas companies, these Mining companies generally look better. However, the companies at the bottom of the list, whose ESG characteristics are not quite as good as those above, are also the smaller companies. There are scores of mining companies listed on the TSX and we suspect, though we have not compiled the data, that as companies get smaller, the poorer the ESG performance is likely to be.

In short, our findings are very encouraging, both for those investors who explicitly want to hold high ESG performers and for those who view ESG ratings simply as an extra tool to finding good long term investments.

ESG is not the only thing that makes a good investment. Another key question is, of course, how the financial numbers for these companies stack up. A quick look at the performance of various indices for metals, mining and gold producers shows hefty declines year-to-date and for the past year. Are there buying opportunities? Which companies look best? We'll take a look next week.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

Postscript: TD Economics' Special Report The Greening of the Canadian Economy reviews the environmental performance of the Canadian mining industry.

ETF Comparison: Developed Country Diversified Equities

Equities of developed market countries such as Japan, Great Britain, Germany etc (about 25 in all) should be a key part of every Canadian investor's asset mix. The diversification into economies that are not entirely in sync and into industries and companies that differ from the heavy resource structure of Canada's can add stability to a portfolio. By their ability to offer such an investment in a large number of companies and countries at low cost, ETFs are an ideal vehicle. This week we will therefore review the strengths and weaknesses of the leading ETFs for this asset class. Our objective is to look for an ETF that can be a good long term holding with broad coverage of countries, industry sectors and companies.

As with our recent review of Emerging Markets ETFs, we used ETF Database to find and get data on the US-traded ETFs in the category. For Canadian-traded ETFs, we used a combination of BMO InvestorLine (reviewed in our ETF Screeners post) and ETF Insight.

Two sets of ETF choices ...
As with Emerging markets ETFs, the largest divide in the options is between traditional passive, cap-weighted index portfolios and those based on a variety of alternative strategies that have been gaining popularity - such as fundamental accounting data weighting, high dividend payout and low portfolio volatility.

1) Traditional Cap-Weighted Index ETFs
Some are traded in US dollars on US stock exchanges, others in Canada on the TSX in Canadian dollars, though they all ultimately hold equities of developed markets countries. Thus, the risk, including any currency risk, is of those countries, not the USA. As our comparison table below shows, the asset base of US ETFs dwarf those of Canadian ETFs.

• Vanguard FTSE Developed ex North America Index ETF (NYSE symbol: VEA) and its two Canadian clones which hold VEA but are traded on the TSX under symbol: VDU in a non-hedged version introduced this past August and VEF in a currency hedged version
• Schwab FTSE International Equity ETF (NYSE: SCHF), which includes of fair dollop of Canadian companies
• iShares MSCI EAFE Index Fund (NYSE: EFA), the grand-daddy behemoth of developed market ETFs and its currency-hedged Canadian clone XIN
• iShares Core MSCI EAFE ETF (NYSE: IEFA) introduced only a year ago and catching on fast due to its lower MER fee cost and wider diversification than EFA; has an unhedged Canadian clone XEF.
• BMO MSCI EAFE Hedged to CAD Index ETF (TSX: ZDM), which is not a clone but is hedged

Comparison Tables (click to enlarge)

Assets, MER, Performance, Taxes 

Country & Sector Holdings

 2) Alternative Strategy ETFs
There is also a mix of Canadian and US-traded ETFs in this group.

• iShares MSCI EAFE Minimum Volatility Index Fund (NYSE: EFAV) and its Canadian clone XMI. The strategy of these funds is to minimize volatility of the ETF as a whole.
• iShares International Select Dividend ETF (NYSE: IDV) has become popular in the USA but there's no Canadian clone so far. Holdings include Canadian companies. Consistent high dividend payers are what it holds.
• iShares International Fundamental Index Fund (TSX: CIE) whose strategy is to select and weight stocks based on sales, cash flow, dividends and book value. It is not hedged. Interestingly, for a foreign country fund sold to Canadians, it includes Canadian stocks.
• PowerShares FTSE RAFI Developed Markets ex-US Portfolio (NYSE: PXF) uses the same stock selection strategy as CIE but the country breakdown is quite different. Also includes Canadian companies.
• SPDR S&P International Dividend ETF (NYSE: DWX) another high dividend seeker that includes Canadian stocks.
• Wisdom Tree DEFA Fund (NYSE: DWM) holds consistent, not necessarily high, dividend payers and excludes Canadian stocks.

Comparison Tables (click to enlarge)

Assets, MER, Performance, Taxes 

Country & Sector Holdings

Country coverage - beware which countries are included or excluded
USA out - We have avoided ETFs containing a heavy component of US equities since we assume that investors will set aside a separate ETF holding for the equities of the world's biggest economy. Besides, many of the good ETF choices are offered on US stock markets and they exclude the USA.

Canada maybe in, maybe out - For Americans and US-based ETFs, Canada is a foreign country, thus many of the US-traded developed market ETFs contain Canadian equities. Our tables below show whether and how much Canada comprises of the total in each ETF. Though it is preferable to not have any Canadian holdings in these ETFs, since we believe investors should and probably have a separate Canadian equity ETF, the problem is not fatal. Canada is usually a fairly small portion of the ETF. Thus, if the developed country ETF is 20% of the overall portfolio, a 5% weight of Canada in the developed ETF means that another 20% x 5% = 1% is held in the overall portfolio. To compensate, an investor could reduce the main Canadian equity holding by 1%.

South Korea maybe in, maybe out - Major index provider MSCI considers South Korea to be a developing country so any ETF using MSCI as its base index provider excludes this country. Meanwhile, other major index provider FTSE says South Korea is a developed markets country. We believe that the world's 15th largest economy merits representation somewhere. The simple way to ensure it is not absent in a portfolio is to choose ETFs for developed and emerging markets (which we reviewed a few weeks back) using the same index index provider. It helps that usually FTSE or MSCI appears in the name of the ETF. Last year when major ETF provider Vanguard announced a change from MSCI to FTSE as its index for these funds, we put together this guide to the geographical structure of ETFs, a number of which we review today.

Japan and Switzerland should be in - Our desire for broad coverage means that Japan, the world's third largest economy and home to many major corporations, must be represented. Similarly, Switzerland, though a small country is home to major corporations as well, including Nestle, which is the single largest holding of a number of our ETFs. However, a couple of our ETFs - IDV and DWX - have little or none of these countries represented, a serious flaw in our view.

Hedging vs Non-Hedging - perhaps beneficial in the short term but a serious return drag in the long term
As in our discussion about this question in the Emerging markets ETFs post, the results for cap-weight ETFs EFA and XIN, as seen in the dark yellow outlined cells of the uppermost table, show a bit better results (higher one-year return, higher Sharpe Ratio - return over volatility - and lower volatility) for XIN than its internal holding EFA. The falling Canadian dollar over the past year has boosted EFA's value within XIN. But over the longer term, the returns for XIN continually lag EFA's due to the costs of hedging. For hedging to be beneficial for a Canadian investor, the considerable costs of doing it would have to be less than the drag of a sustained long term rise in the Canadian dollar against the many currencies of the developed countries, primarily the euro, yen, pound sterling, swiss franc, australian dollar etc.

Returns, Yields, MERs, Price/Earnings, Volatility - no clear picture
It is hard to discern a clear winner amongst the variety of ETFs, as the mix of green (i.e. stronger or better) and orange (comparatively weaker) numbers down and across the tables illustrate. Some ETFs have outstandingly low MERs and huge asset bases that keep bid-ask spreads tight, others better returns or Sharpe ratios, or more attractive Price/Earnings and Price/Book Value valuations. Short term returns look better for some while longer term 5-year returns look better for others. What the results will be in the very long term of decades is hard to tell, especially between the traditional cap-weight ETFs and the alternative strategy ETFS.

The portfolio volatility-minimizing objective of EFAV seems not to be very well in hand as its 1-year standard deviation is as high or worse than many of the other ETFs.

Foreign Witholding Taxes - be careful which ETF goes in which account
As we explained in Pros and Cons of Cross Border Shopping for ETFs in the USA, the clone versions of ETFs are susceptible to unrecoverable US witholding taxes in registered accounts on top of similar witholding taxes levied in the home country of the under-lying equities. Foreign non-US witholding taxes are completely lost to the Canadian investor, i.e. not avoidable and not claimable on a Canadian income tax return as a credit for foreign tax paid, in all registered accounts and for all types of ETFs. In our tables above, red text shows unrecoverable double taxation (US and other foreign), "neutral" means US tax is avoidable or Canadian tax credit is available and green text indicates US tax is avoidable and other foreign tax is claimable as a credit. Green only applies when the ETF is Canadian-traded and directly holds the equities - only CIE and ZDM are green and only in a regular taxable account. The impact is this: if an ETF distributes 3% cash and loses the standard 15% witholding tax, that is a constant 3% x 15% = 0.45% yearly return reduction. That's like doubling or more the fund's MER.

Holdings - some ETFs lack diversification
EFAV / XMI, IDV and DWX have a small number of companies in their holdings along with quite a high concentration in the top ten holdings in the latter two.

VEA / VDU / VEF, EFA / XIN, IEFA / XEF, ZDM and DWM have the convenience advantage of systematically excluding Canada from their holdings.

Bottom Line
Of the 16 ETFs under consideration, it seems a process more of elimination than selecting one or two best choices. EFAV / XMI, IDV and DWX do not achieve the diversification objective and so would be off our preferred list. We prefer non-currency hedged versions of funds but other investors may disagree and for those who do want hedging, ZDM works best from a tax viewpoint. Beyond that, the choice gets to the possible longer term benefits of alternative strategies against cap-weighting (see our post on New Improved Model Portfolios). However, the remaining choices look reasonable and the important step is to acquire and maintain a portfolio allocation in developed country equities.

Disclosure: This blogger owns some PXF.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor. 

Preferred Shares with High-Yield, Safety and Fixed Maturity

A few weeks back we compared fixed income investments and discovered that a couple of preferred shares from split share corporations offered the highest rates available for investments maturing in the next couple of years. Today, we'll update our September 2012 review of preferred shares, looking for promising investments by seeing how preferred shares with a great degree of safety and a fixed maturity date match up across the whole range of years ahead.

What we mean by "safe"
We want to minimize the chance of not getting our money back, so we select only preferreds with an investment grade rating from ratings agency DBRS of Pfd2-Low or higher (see table of ratings in Appendix B of Raymond James July 2013 Preferred Share Report).

Getting your money back also means knowing what you will receive when
Like GICs and bonds which promise to return a fixed amount at maturity, we pick the subset of preferred shares which promise to return a definite amount at a certain time in future.

Unlike bonds and GICs, several of our preferred shares, shown by green highlight cells in our comparison table, have a sliding scale of the amount to be returned. As with virtually all preferred shares, the company issuing the share has reserved the right to buy the shares back earlier than the ultimate maturity date. But in the case of this subset of preferreds, the price paid back is higher the earlier the re-purchase, which is termed a call or redemption by the issuer. For instance, CGI Series 4, 3.75% (TSX symbol: CGI.PR.D) may be forcibly repurchased from an investor owning it at a price of $26.00 till the 15th of June, 2019, then at $25.75 till 15 June, 2020, then at $25.50 till 15 June 2021, then at $25.25 till 15 June 2022 and finally at $25.00 from then till final maturity on 15 June 2023. It is a bit complicating that each preferred share has its own schedule so it is necessary to consult a source such as Prefinfo.com, which maintains an up to date list of all preferred shares. The July 2013 CIBC Wood Gundy Canadian Preferred Shares Report also has those details grouped together by type of share.

The sliding scale is a plus for the investor, being a disincentive for the company to redeem early as can be seen in the Yield to Possible Early Redemption column of the comparison table. The yield for such sliding scale preferreds would end up being higher for the investor than if the preferred stays in existence till maturity - e.g. Partners Value Split Corp. 7.25% Class AA Series IV (TSX: BNA.PR.D) matures on 9 July 2014 at $25.00 but if the company were to call it anytime beforehand, it would have to pay the investor $26.00 and the yield is almost double.

Comparison Table
The table below of twenty-three preferred share issues includes four sets of important factors to consider - Value, or what will be the yield/return; Call/Early Redemption Factors, or what are the chances the share will be called before maturity; Security, or what is the level of safety and; Liquidity, or how easy is it to buy or sell shares.

(click to enlarge image)

Value
A key question is how much the return will be. Our calculations were done with Shakespeare's free downloadable spreadsheet. We show three answers.

1) Yield to Maturity at Closing Price - the annual return from buying at the market closing price on 3 October 2013 and holding till maturity.

2) Yield to Possible Early Redemption - again we buy at closing price but instead of the maturity redemption amount, we calculate what return would result from the amount promised at the next date at which the company has the right to call the shares. In some cases, like for BNA.PR.D and CGI.PR.D we investors would be happy with a higher return. But in others, such as 5Banc Split Inc (FBS.PR.C), the 2.56% yield to maturity turns into a negative 17.77% return, a big loss. The reason is that paying $10.86 for a share that might be called on 15 December 2013 at $10.00 and pay only $0.13125 dividend up to that date is a losing proposition.

3) Yield to Maturity at Ask Price - It may not be possible to buy the shares at the latest closing price, especially when there is a low volume of shares traded daily. For such shares there is often a large gap between the price on the TSX at which investors are offering to buy, the bid price, and the higher price at which other investors are willing to sell, the ask price. Everyone tries to buy low and sell high! A more conservative estimate is thus the asking price. But that lowers the potential yield, sometimes drastically, as our table shows. Big 8 Split Corp Class C 7.0% (BIG.PR.C) maturing in December 2013 goes from a very attractive 4.65% yield when bought at closing price of $12.07 to a 0.73% loss when the ask price (as of October 3rd) of $12.20 is paid. When the the time to maturity is short and there are not many dividend cash flows to provide return, purchase price matters a lot. As can be seen in the table, there is much less of a hit to yield from paying the ask price for longer maturity securities.

On the basis of yield factors, First Asset CanBanc Split Corp. (CBU.PR.A) and Utility Split Trust 5.25% (UST.PR.B) look to be very unattractive, promising more loss than gain.

Call / Early Redemption Factors
These factors give an idea of the chance that the shares will be called, possibly to the investor's detriment. A danger sign is when the preferred's market price is above the redemption / maturity price, but we need to take account of the sliding scale. Alternatively, for some split share corporations, early cash-out can occur if capital shares are given in by investors forcing preferred shares to be sold. Sometimes capital shares and preferred shares can only be submitted with a preferred share so a premium on one may partly of fully offset the discount on the other for arbitragers seeking to profit from a price below Net Asset Value e.g. CBU.PR.A and UST.PR.B.

Three preferreds appear to be at some risk of early redemption due to a fairly large discount (highlighted in red text) on capital shares that can be submitted for retraction by themselves: Allbanc Split Corp. II (ALB.PR.B), BNS Split Corp. II (BSC.PR.B) and R Split III Corp (RBS.PR.B)

Security
The basic and most important default risk indicator is the DBRS rating, where the CGI Series 3, 3.90% (CGI.PR.C) and CGI Series 4, 3.75% (CGI.PR.D) get the highest rating of the bunch Pfd-1Low. A secondary indicator is the amount of capital share value as a percentage of the total company value. The higher the capital percentage the better. The lowest coverage ratio is Brookfield Investments Corp 'A' (BRN.PR.A) at 45.9%, though DBRS still rates it investment grade. To see that all the preferreds in our list are quite safe, it may be useful to note that preferreds of BCE Inc are rated a notch lower, below investment grade, at PFd-3High.

Liquidity
Many of the preferred shares in our list do not trade in large volumes, often because there are just not many in existence. The result is that it is difficult to buy and sell shares and there is often a big gap between ask (offers to sell) and bid (offers to buy) prices. An investor is wise to trade using a fixed limit price instead of a market price (see BMO InvestorLine's glossary). Our table shows shares with big Bid-Ask spreads and low volume shares in orange text. Poor liquidity is not an insurmountable problem but it can be inconvenient and potentially costly, as the reduced yields using ask price show.

Bottom Line
Putting it all together, we have picked out the preferreds with the best combination of high yield along with good liquidity and protection from the bad effects of early redemption.

• Allbanc Split Corp. (ABK.PR.C)
• Partners Value Split Corp. 7.25% Class AA Series IV (BNA.PR.D)
• Partners Value Split Corp. 4.95% Class AA Series I (BNA.PR.B)
• Partners Value Split Corp. 4.85% Class AA Series V (BNA.PR.E)
• Partners Value Split Corp. 4.35% Class AA Series III (BNA.PR.C)

Our picks show in green text colour in the table and the chart below displays the choices by year of maturity. We have not picked CGI.PR.D maturing in 2023 since there are higher rated corporate bonds offering the same or better yield, which we saw in the September 13 post. One good choice that doesn't fit on the chart, since it has no pre-set maturity, is Brookfield Investments Corp 'A' (BRN.PR.A). Instead, the investor has the liberty to retract it (sell it back to the company) at the price of $25.00 at any time.

Disclosure: This blog writer owns BNA.PR.C shares.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.