I believe the preferred shares of AIM (e.g. AIM-C) represent a very good opportunity, and so I have been buying them recently. Although they are preferred shares, the company recently cancelled the upcoming dividend payment because of a significant event, which caused the pref shares to tumble by 33% (from 12 to 8). These pref shares also fell 33% when the significant event was announced previously (from 18 to 12).
However, the pref dividends are cumulative, meaning any missed
dividends continue to accrue. So for example if the company ever does
want to pay a dividend again to common shareholders, it has to pay all
the pref dividends it missed.
Aimia owns and operates loyalty programs. For example, customers
accumulate points on their credit cards, and then use those points to
buy vacations and other products. Aimia manages a few of these loyalty
Aimia's Aeroplan program has a contract with Air Canada that runs
until 2019. Recently, Aimia announced that Air Canada would not renew
the contract after expiry, meaning Aeroplan points holders would no
longer get discounts when they redeem their points with Air Canada.
This is the significant event that caused shares to drop, and then
caused the dividend to be cancelled.
This is an important part of Aimia, as air travel represents 73% of
the of the rewards claimed by Aeroplan members, and Aeroplan
represents almost 60% of Aimia's revenue.
Aimia therefore has to find a new partner(s) to keep their customers
happy to continue accumulating and redeeming points. The main risk
here is that they can't, in which case Aeroplan goes to 0 after 2019.
Even if that happens, Aimia has an international segment that
generated $51 million in operating income in 2016. The annual
preferred dividend is less than $10 million per year.
There is debt of $450 million and pension of $70 that rank ahead of
the preferreds at $520 million total. However, the company also has
cash of $300 million + short-term securities of $100 million +
long-term investments of $350 million + equity-accounted investments
(a joint venture in Europe that earned Aimia $15 million in 2016) of
$100 million, for a total of $850 million, easily covering the debt
and then some!
If the company ever resumed paying the dividend, it would have a yield
of 20% at the current $8 price.
I think the price is so low because fixed-income investors were forced
to sell when this no longer was a fixed-income investment. As such, I
believe there is an opportunity here for much higher upside than
downside. In the upside, I think the pref shares can be worth $25 in a
normal interest rate environment and if the company were to maintain
its program with a new partner.
However, this is not an investment where the downside is totally
protected. It could end up like a run on a bank, where customers
decide to cash in all their points before 2019, and stop redeeming
points in order to switch to another program. This could cause
bankruptcy. So I would say there is an asymmetric opportunity here,
but not fully protected on the downside.
Disclosure: Author has a long position in shares of AIM-C