Normally, when shares of a mature company are flirting with 52-week lows, the company sports a nice, juicy dividend. Sometimes the viability of that dividend is in question, but usually the yield has grown to the point where investors can get excited about collecting a generous dividend while waiting for the company to recover. That’s not really the case with Bombardier Inc. (TSX: BBD.B), the beleaguered manufacturer of planes and trains, and its 2.8% yield. The problem is with the company’s new line of CSeries aircraft, a program that has been mired in a seemingly endless quagmire of cost overruns and…
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Normally, when shares of a mature company are flirting with 52-week lows, the company sports a nice, juicy dividend. Sometimes the viability of that dividend is in question, but usually the yield has grown to the point where investors can get excited about collecting a generous dividend while waiting for the company to recover.
That’s not really the case with Bombardier Inc. (TSX: BBD.B), the beleaguered manufacturer of planes and trains, and its 2.8% yield. The problem is with the company’s new line of CSeries aircraft, a program that has been mired in a seemingly endless quagmire of cost overruns and delays.
In the latest setback, the company experienced engine problems in one of its prototype planes and has been forced to ground all flights for more than two months. It appears testing will resume shortly, but this latest delay could mean yet another delay in the expected delivery date for customers, which has already been pushed back once. At this point customers have been remarkably patient, considering the setbacks.
At some point Bombardier will release a new plane. It’s already sunk more than $4 billion worth of capital into the project, and to borrow a baseball analogy, we’re in about the seventh or eighth inning of development. Even with another delay, we’re a maximum of about 18 months away from planes actually being delivered to customers.
But as a whole, the market is driven by short-term events. So even though Bombardier has a healthy cash position, a solidly profitable train division, and a backlog of 203 CSeries jets on order (along with options for 150 more), shares have sunk to near multi-year lows.
If you’re a believer in the company and the success of CSeries, there are a couple of ways to invest in the recovery.
The first is to simply to buy the common stock and tuck it away for a few years. If you do that, I think you’ll do well. There’s a great deal of upside potential in the common shares, assuming the company can fix its problems. I recently wrote about how I think the shares have the potential to double.
I think the worst of the CSeries struggles are behind it, but each time it announces yet another delay, shares are going to get punished. Many investors may want to participate in the recovery, but in a way to do so without taking on that much risk.
There’s an easy way to do this. Oh, and you’ll get paid more than 7% to wait. How?
Just buy the preferred shares.
The Series C Preferred Shares (TSX: BBD.PR.C) currently pay a $1.56 annual dividend, good enough for a 7.14% yield. Like the common stock, the preferred shares have also lost ground over the last year, but they’re down a mere 4.25% compared to the 25% drubbing taken by common shareholders. The preferred shares offer a nice amount of protection compared to the common shares.
This series of preferred share has traded since 2002, and the company has yet to miss a dividend. It trades at less than $22, and comes with a $25 redemption price. This means the company has the right to pay $25 for each shares in cash at each anniversary date and buy investors out. There’s little chance of this happening anytime soon, but could happen once CSeries production really gets rolling and the company starts recording profits from the division. Think of the redemption as a potential bonus, rather than something that’s likely.
Bombardier has aggressively taken on debt over the last few years, causing investors demand more yield for its preferred shares. There’s little risk in running into any problem in the near term — after all, the company is sitting on more than $3 billion in cash — but the debt risk could rear its ugly head if it continues to see CSeries problems.
Bombardier’s preferred shares give investors the chance to get paid a handsome dividend while waiting the the company to recover. If you’re looking for a low risk way of playing the company’s recovery, this is it.
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Fool contributor Nelson Smith has no position in any stocks mentioned.