Fairfax Financial: Redemption and Reallocation

Fairfax Financial Holdings Limited (FFH) has announced its intention to redeem all of its outstanding Cumulative 5-Year Rate Reset Preferred Shares, Series C and Cumulative Floating Rate Preferred Shares, Series D. This move, totaling C$250 million, represents a strategic shift in FFH's capital structure and offers insights into their investment philosophy.

FFH's decision to redeem its preferred shares is a testament to its commitment to stability and predictability, values that the author holds dear. By redeeming these shares, FFH can reallocate capital towards more profitable or strategic investments, such as those in the under-owned energy sector or acquisitions for organic growth, as seen with Salesforce. This move allows FFH to maintain its capital structure, invest in core businesses, or pursue strategic acquisitions, all while enhancing its long-term growth prospects.



The redemption of preferred shares also has tax implications for both FFH and its shareholders. For FFH, the redemption price of C$25.00 per share, plus accrued dividends, will be considered a tax-deductible expense, reducing their taxable income. Shareholders will recognize capital gains upon redemption, with the gain being the difference between the redemption price and their adjusted cost base. Canadian residents may be subject to a 50% inclusion rate for capital gains, while non-residents may face a 15% withholding tax on dividends and capital gains.

FFH's redemption of preferred shares is likely to impact its future dividend policies and payout ratios. The redemption allows FFH to reallocate capital towards more profitable investments, potentially increasing its dividend payouts to common shareholders. Additionally, the redemption may lower FFH's payout ratio, suggesting higher retained earnings, allowing FFH to reinvest in its core businesses and drive future growth.



The author's core investment values emphasize stability, predictability, and consistent growth. They favor 'boring but lucrative' investments, valuing companies like Morgan Stanley that offer steady performance without surprises. The author's preference for a balanced portfolio, combining growth and value stocks, aligns with FFH's strategic move. By redeeming its preferred shares, FFH demonstrates a commitment to maintaining a balanced capital structure, investing in core businesses, and pursuing strategic growth opportunities.

In conclusion, FFH's redemption of C$250 million in cumulative preferred shares is a strategic move that aligns with the author's investment values. This redemption allows FFH to reallocate capital towards more profitable or strategic investments, enhance its long-term growth prospects, and maintain its commitment to stability and predictability.