LFE.PR.A: Yield-to-Worst, Curve Price & Valuation (sort of)

In the comments to the June 1 Market Action Report, assiduous reader tobyone posted:

RE: 5.25% LFE.PR.A bid @10.26 indicates yield of over 5% according to Globeinvestor and TDW yield calculators vs. your table. I hope this is an error because I hold this one but don’t want it @4.73%

Well, Globeinvestor and TDW are enormous companies, with an excellent record of sticking their brand name on various things, but I’ll see what I can do.

I stand by my calculation of 4.73%. First, the details, in all their glory, from the HIMIPref™ cashFlowDiscountingAnalysisBox:

A3555025 0138
2007-07-10        DIVIDEND   0.04   0.995022   0.04
2007-08-10        DIVIDEND   0.04   0.991082   0.04
2007-09-10        DIVIDEND   0.04   0.987158   0.04
2007-10-10        DIVIDEND   0.04   0.983376   0.04
2007-11-10        DIVIDEND   0.04   0.979482   0.04
2007-12-10        DIVIDEND   0.04   0.975729   0.04
2008-01-10        DIVIDEND   0.04   0.971866   0.04
2008-02-10        DIVIDEND   0.04   0.968018   0.04
2008-03-10        DIVIDEND   0.04   0.964433   0.04
2008-04-10        DIVIDEND   0.04   0.960614   0.04
2008-05-10        DIVIDEND   0.04   0.956933   0.04
2008-06-10        DIVIDEND   0.04   0.953145   0.04
2008-07-10        DIVIDEND   0.04   0.949493   0.04
2008-08-10        DIVIDEND   0.04   0.945733   0.04
2008-09-10        DIVIDEND   0.04   0.941989   0.04
2008-10-10        DIVIDEND   0.04   0.938380   0.04
2008-11-10        DIVIDEND   0.04   0.934664   0.04
2008-12-10        DIVIDEND   0.04   0.931083   0.04
2009-01-10        DIVIDEND   0.04   0.927397   0.04
2009-02-10        DIVIDEND   0.04   0.923725   0.04
2009-03-10        DIVIDEND   0.04   0.920421   0.04
2009-04-10        DIVIDEND   0.04   0.916777   0.04
2009-05-10        DIVIDEND   0.04   0.913264   0.04
2009-06-10        DIVIDEND   0.04   0.909648   0.04
2009-07-10        DIVIDEND   0.04   0.906163   0.04
2009-08-10        DIVIDEND   0.04   0.902575   0.04
2009-09-10        DIVIDEND   0.04   0.899002   0.04
2009-10-10        DIVIDEND   0.04   0.895557   0.04
2009-11-10        DIVIDEND   0.04   0.892011   0.04
2009-12-10        DIVIDEND   0.04   0.888593   0.04
2010-01-10        DIVIDEND   0.04   0.885075   0.04
2010-02-10        DIVIDEND   0.04   0.881571   0.04
2010-03-10        DIVIDEND   0.04   0.878418   0.04
2010-04-10        DIVIDEND   0.04   0.874940   0.04
2010-05-10        DIVIDEND   0.04   0.871587   0.04
2010-06-10        DIVIDEND   0.04   0.868137   0.04
2010-07-10        DIVIDEND   0.04   0.864810   0.04
2010-08-10        DIVIDEND   0.04   0.861386   0.04
2010-09-10        DIVIDEND   0.04   0.857976   0.04
2010-10-10        DIVIDEND   0.04   0.854688   0.04
2010-11-10        DIVIDEND   0.04   0.851304   0.04
2010-12-10        DIVIDEND   0.04   0.848043   0.04
2011-01-10        DIVIDEND   0.04   0.844685   0.04
2011-02-10        DIVIDEND   0.04   0.841341   0.04
2011-03-10        DIVIDEND   0.04   0.838331   0.04
2011-04-10        DIVIDEND   0.04   0.835012   0.04
2011-05-10        DIVIDEND   0.04   0.831813   0.04
2011-06-10        DIVIDEND   0.04   0.828520   0.04
2011-07-10        DIVIDEND   0.04   0.825345   0.04
2011-08-10        DIVIDEND   0.04   0.822077   0.04
2011-09-10        DIVIDEND   0.04   0.818822   0.04
2011-10-10        DIVIDEND   0.04   0.815685   0.04
2011-11-10        DIVIDEND   0.04   0.812455   0.04
2011-12-10        DIVIDEND   0.04   0.809342   0.04
2012-01-10        DIVIDEND   0.04   0.806138   0.04
2012-02-10        DIVIDEND   0.04   0.802946   0.04
2012-03-10        DIVIDEND   0.04   0.799972   0.03
2012-04-10        DIVIDEND   0.04   0.796805   0.03
2012-05-10        DIVIDEND   0.04   0.793752   0.03
2012-06-10        DIVIDEND   0.04   0.790609   0.03
2012-07-10        DIVIDEND   0.04   0.787580   0.03
2012-08-10        DIVIDEND   0.04   0.784461   0.03
2012-09-10        DIVIDEND   0.04   0.781356   0.03
2012-10-10        DIVIDEND   0.04   0.778362   0.03
2012-11-10        DIVIDEND   0.04   0.775280   0.03
2012-12-01  FINAL DIVIDEND   0.03   0.773199   0.02
2012-12-01        MATURITY  10.00   0.773199   7.73
Total Cash Flows    12.8739
Total Present Value    10.2597
Discounting Rate 4.7291 % (Annual rate compounded semi-annually)

More simply, I’ll say: OK, this thing pays $0.525 p.a. At a price of $10.26, it will give rise to a $0.26 capital loss on its maturity 2012-12-1. That’s 5.5 years away so call the annual capital loss $0.05 (for the sake of an argument). Therefore, of the $0.525 dividends received every year, $0.475 is income and $0.05 is return of capital. Over the period, my average capital invested is (10.26 + 10.00) / 2 = 10.13. Therefore, my (very roughly calculated) yield is $0.475/$10.13, or 4.69%, which is close enough to my precisely calculated yield of 4.73% that I’m not going to panic.

I’m not familiar with the GlobeInvestor or TDW yield calculators – if you will send me a link, I’ll take a look at them. The most common errors with such things are:

  • Are they calculating current yield = $0.525 / $10.26 = 5.12%? This is wrong, since it ignores the capital loss on maturity.
  • Are all the dividends incorporated? Ex-dates can be a little tricky.
  • Monthly dividends can be a little tricky to jam in to some calculators. Has this been done properly?

I recommend Keith Betty’s Yield Calculator (broken link redirected 2024-2-1).

Now I have another question … you indicated that you didn’t want to own this thing at 4.73%, but you didn’t indicate precisely why. Now, I’m not going to take a public position on the merits of LFE.PR.A as an investment at the current price (and please, don’t spend hours parsing everything I write from here on in trying to decide what I really think!), but the comment makes me suspect that you think a sale at a 4.73% yield is a slam-dunk … and whatever the verdict is, I don’t think it’s a slam-dunk-sell.

In your comment, you mentioned CM.PR.J as a possible buying opportunity, given its closing pre-tax bid-YTW of 5.03%. Now, this is more than LFE.PR.A, but CM.PR.J is a perpetual and there are other differences besides. In terms of the riskAttributes examined by HIMIPref™, the major differences are:

  • Credit Quality: CM.PR.J is better.
  • Retractible:LFE.PR.A is better.
  • SplitShare: CM.PR.J is better
  • Various Duration & Convexity Measures: Well, they’re different!
  • Cumulative Dividends: LFE.PR.A is better.
  • Liquidity: (not a formal risk measure, but it is important) CM.PR.J is better

Anything you can tell me about how you value LFE.PR.A will, at the very least, give me some ideas regarding what to write about!

 

One Response to “LFE.PR.A: Yield-to-Worst, Curve Price & Valuation (sort of)”

  1. tobyone says:

    RE: LFE.PR.A. Thank you for the yield calculation information. On review it is clear that TDW, BMO Investorline and Globeinvestor are calculating current yield only, ignoring capital loss on maturity.

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