The preferred share market has performed well so far in 2020. As of January 29, the preferred shares we own have posted modest price gains (~0.6%) and are on track to pay nice dividends (~5.5%/year on average). We continue to think preferred shares offers good value and highlight the following to charts to demonstrate their appeal.
The first chart compares the risk that is priced into rate reset preferred shares (red line) versus bonds (blue line). The gap between the two is elevated and at levels that have historically preceded periods of strong preferred share outperformance relative to corporate bonds.
Chart 1 – Preferred Shares Effective Reset Spreads vs. Corporate Bonds
The second chart is a measure of preferred share new issuance and shows that there has been no supply in Canada since May 2019 and net supply has actually been modestly negative thanks to redemption and buyback activity. This tells us that preferred shares are a relatively expensive funding vehicle for companies and they are opting to issue cheaper, low-coupon debt.
Chart 2 – Preferred Share Net Issuance by Month (Since June 2018)