Enbridge Preferred Shares Offering 8.65% Yield: A Closer Look at Series 4 (NYSE:ENB)
Preferred shares in Canada offer investors a unique opportunity to invest in companies with a conversion component. Enbridge, a large company in the energy sector, recently issued a new series of preferred stock with a quarterly preferred dividend payment based on the three-month government bond rate. This new Series 4 of preferred shares started trading just a few days ago, and there are some key factors to consider before investing in this offering.
Series 4 Details and Conversion Process
Enbridge announced in August that it was not planning on redeeming its Series 3 preferred shares, giving Series 3 shareholders the option to convert their securities into the newly created Series 4 preferred shares. The threshold for conversion was set at 1 million shares, and surprisingly, over 1.5 million Series 3 shares were converted into Series 4. This means there are now approximately 22.5 million Series 3 shares outstanding and 1.5 million shares of the newly created Series 4.
The Series 4 preferred shares are currently trading at C$19.46, with an initial floating rate dividend of 42.206 Canadian Dollar cents per share. This represents an annualized dividend yield of approximately 6.75% based on the par value of the security. However, it is important to note that the preferred dividend will be reset every quarter based on the three-month Canada Government Treasury bill plus a mark-up of 238 bps.
Analyzing the Yield and Potential Risks
While the current yield on the Series 4 preferred shares is attractive at 8.65% based on the current share price, there are potential risks to consider. The three-month government bond yield has been decreasing in recent months, and with the possibility of further rate cuts, the quarterly preferred dividend could decrease in the future. It is important to monitor the interest rate environment and its impact on the preferred dividend payouts.
Comparing Series 4 to Series 3
Investors may also consider comparing the Series 4 preferred shares to the Series 3 preferred shares, which offer a fixed rate dividend for the next five years. The Series 3 preferred shares currently yield approximately 7.3%, while the Series 4 preferred shares would need a three-month Canada government bond yield of 3.3% to offer a similar yield. However, with the current interest rate environment and the potential for further rate cuts, the yield on the Series 4 preferred shares could be affected.
Investment Thesis and Conclusion
While the Series 4 preferred shares of Enbridge offer a speculative opportunity for investors looking to capitalize on short-term interest rates, there are risks to consider. The uncertain interest rate environment and the potential for lower dividend payouts in the future make the Series 4 offering less appealing for some investors. It is important to weigh the risks and rewards before investing in this new series of preferred shares.
In conclusion, the decision to invest in Enbridge’s Series 4 preferred shares ultimately depends on individual risk tolerance and investment goals. While the current yield may be attractive, it is important to consider the potential impact of changing interest rates on the preferred dividend payouts. Investors should conduct thorough research and consult with a financial advisor before making any investment decisions.