Bought Canada Life Preferred (B) @ 23.39

On May 11, 2009, I bought a preferred share issue from Canada Life insurance for 23.39/share (cl.pr.b). At that price, the yield is 6.7%. I am not hedging this purchase. This preferred share is redeemable at 25$.

I was looking for a solid company with a high yielding preferred share issue. Canada Life also has common shares, but they have all been bought by great west lifeco. Canada Life has the following characteristics.

• The payout ratio on the common shares for last FY was 49%
• It paid out 521.56M in dividends on the common shares, but only 14.46M on the preferred shares.
• These two preceding bullet points are important because Canada Life would have to stop paying dividends on the common shares before it decreased payments on the preferred shares. These preceding points show how safe the preferred dividend is.
• It made money in 2008, in terms of net income, comprehensive income, and cash flow. At lot of Canadian insurance companies did not.
• Its assets/liabilities is 1.1, which is pretty much the same as several other Canadian insurers I looked at. (Reuters and GlobeInvestor were showing very low debt/equity ratios which I don't know how they calculated. I guess they excluded insurance policy liabilities, but I'm not sure. Consequently, I made up my own simple measure of assets/liabilities.)
• Its ROE was above 15% for the last four years, which is pretty good for a life insurer according to Pat Dorsey (2004; The Five Rules for Successful Stock Investing)
• Unlike Berkshire Hathaway and Fairfax Financial, Canada Life has most of its investments (67.5%) in A rated bonds.
• Unrealized losses represent 5% of its investment portfolio.

Pretty solid, it seems to me.

Why Invest at All?

My last post was all doom and gloom. So the question arises as to why invest at all? Why not just stay in cash? There are two answers:

1- Because the stock market is a leading indicator. In the past, it has gone up before economic recoveries. Indeed, both the TSX and s&P500 are up a bit more than 30% since their March low. If it sticks, the markets would have again risen before the recovery.

2- By buying stocks with a good yield, I benefit from that yield even though I'm hedging. For example, if I buy XYZ at 100, yielding 5%, and it goes up to 150, my hedge will wipe out that capital appreciation. But I'm still getting 5%. Had I waited until the stock was at 150 before buying, the yield would only be 3%. If my hedge works perfectly, I'm ahead by buying early and hedging.