Most investors want nothing to do with any security issued by Bombardier these days. The B shares of the beleaguered Quebec-based plane and train manufacturer sunk into penny stock territory at 72 cents earlier this year, down from about $4 just over 12 months ago.
They have rallied since on the expectation Ottawa will follow the Quebec government's $1-billion (U.S.) lead with a cash infusion of its own. But the sellers were out again on Friday afternoon following publication of reports that the company was unhappy with the terms of a proposed federal bailout, leaving the talks in limbo. The shares, which had traded as high as $1.79 earlier in the day, finished at $1.62.
Without a cash injection from Ottawa, Bombardier's survival becomes a huge question mark. The company is heavily in debt, its C series jetliner has run into numerous problems, and it has been unable meet some order deadlines, prompting a lawsuit threat from the Toronto Transit Commission over failure to deliver streetcars on time.
Taking all that into account, Bombardier is not an ideal candidate for a government bailout, which could amount to throwing good money after bad. But the pressure from Quebec is intense so it may yet happen.
If it does, it will make the holders of the company's preferred shares very happy and offer an opportunity for speculators. Bombardier has three classes of publicly traded preferreds, trading under the symbols BBD.PR.B, BBD.PR.C, and BBD.PR.D. All are trading at a fraction of their issue price, with yields ranging from 10 per cent to 12 per cent.
Returns like that tell you that investors believe these shares are extremely risky. So far, the company has continued to make its regular payments – the B shares pay monthly, the other two quarterly. But people are worried that the day will come when Bombardier runs out of money, suspends the dividend, and the shares will fall to almost zero.
It could happen, of course. But if Ottawa joins with Quebec in a bailout, the chances of such an outcome will be greatly reduced. That creates an opening for aggressive investors.
Let's look at the company's Series 4 Preferred Shares (BBD.PR.C). This is a straight preferred, meaning its dividend does not change with interest rate movements. It makes quarterly payments of 39.06 cents per share ($1.5624 annually), to yield just over 12 per cent at the recent price of $12.94. As mentioned, investors have not missed a payment despite the financial troubles of the company. That doesn't mean Bombardier won't omit the dividend in the future. However, the company is still in the black despite all its problems, posting adjusted net earnings of $326-million (14 cents per common share) in 2015.
These shares traded as low as $6.75 last summer, at which point the yield was an astounding 23 per cent. They have almost doubled in value since, although they are only about half the original issue price of $25.
So there is still a lot of upside here and if the federal government does come through with a large cash infusion it's likely these preferreds will move even higher.
It's a risky play and only for those who don't have a queasy stomach and can accept a potential loss. But the upside potential if Bombardier recovers is significant. Consult with a financial adviser before taking any action.
Switching gears, I said in a recent column that Equitable Group's new on-line EQ Bank is not yet taking deposits but is inviting people to reserve a spot at rate of 3 per cent. (Update: The bank lowered its rate to 2.25 per cent on April 18). I received the following clarification from Andrew Moor, CEO of Equitable Bank.
"We are taking clients in EQ Bank, our digital offering. In fact, we have over 15,000 clients successfully on-boarded and with deposits in the Bank. Our goal is to offer a great customer experience. In order to try to deliver that service, we on-boarding clients in an orderly fashion so we can answer their questions quickly in our call centre and all the other things that customers deserve. Prospective clients can put themselves on a list and will get an invitation to actually sign-up as they reach the top of the list (we are on-boarding several hundred customers a week).
"We are offering a single rate of 3 per cent to all customers in our Savings Plus Account. While the rate will likely change marginally downwards sooner than later – we want to stand firm in offering all our clients the same good rate and avoid the approach of offering limited time special offers and different rates for different customers. Simple and transparent is the goal!"
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. Follow him on twitter @GPUpdates and on Facebook.
Gordon Pape