Great-West Lifeco's Preferred Shares: Index Exclusion, Undervaluation, and Redemption Opportunities for Income Investors

The removal of Great-West Lifeco (GWO) preferred shares from the S&P/TSX Preferred Share Index in 2017 sent ripples through the income-investing community. While the exact reason for the delisting remains opaque—due to an inaccessible S&P Global document—the event has had lasting implications for investors. The exclusion likely stemmed from a combination of corporate actions, such as the redemption of specific series (e.g., Series F in 2021) or broader index rebalancing. Whatever the cause, the aftermath has created opportunities for astute investors to evaluate the remaining preferred share series for undervaluation and redemption potential.

The Aftermath of Index Exclusion

When a security is removed from a major index like the S&P/TSX Preferred Share Index, it often triggers a sell-off as index-tracking funds and passive investors divest the asset to maintain alignment with the index. For Great-West Lifeco's preferred shares, this likely depressed prices, creating discounts to their $25 liquidation preference. For example, as of July 18, 2025, Series N trades at $18.27—a 26.9% discount—while Series G and M trade at $22.75 and $24.80, respectively. These discounts suggest market skepticism about future dividend stability or redemption likelihood.

The yield differential is equally striking. Series M offers a 5.84% yield, while Series N yields a mere 2.39%. This disparity reflects varying perceptions of risk and redemption timelines. For instance, Series N's 5-year rate reset feature introduces uncertainty, as future resets could reduce its yield if interest rates remain elevated. Meanwhile, fixed-rate series like M and L are more attractive to income investors seeking predictable cash flows.

Undervaluation and Redemption Opportunities

Great-West Lifeco's capital management strategy has historically included both share repurchases and preferred share redemptions. The 2021 redemption of Series F—paid at $25 per share—demonstrated the company's willingness to optimize its capital structure. With Q1 2025 results showing $111 million in common share repurchases under its $500 million NCIB, the firm appears committed to returning value to shareholders. This raises the question: Could other preferred share series be next?

Investors should focus on the following:
1. Discounted Series with Redemption Risk: Shares trading at significant discounts (e.g., Series N at $18.27) may be candidates for redemption if the company deems it advantageous. However, the potential for a deemed dividend upon redemption—arising from the gap between paid-up capital and redemption price—adds complexity.
2. Yield Arbitrage: Fixed-rate series like M and L offer attractive yields (5.84% and 5.81%, respectively) in a rising rate environment. These could appeal to investors seeking high current income, provided the company maintains its dividend-paying capacity.
3. Tax Considerations: The redemption of Series F highlighted the importance of tax elections (e.g., T2057 filings). Investors in other series should consult advisors to understand the tax implications of redemptions or deemed dividends.

Strategic Implications for Income Investors

The removal from the S&P/TSX Preferred Share Index may signal a strategic shift in Great-West Lifeco's capital management. By reducing its reliance on preferred shares—many of which trade at discounts—the company could be positioning itself to leverage cheaper forms of capital or strengthen its balance sheet. For income investors, this duality presents both risk and reward:

• Risk: Redemption of discounted shares could erode unrealized gains or trigger deemed dividends.
• Reward: Undervalued shares like Series N and Y offer potential for price appreciation if the company maintains its dividend-paying strength or initiates a buyback.

Investment Advice

1. For Aggressive Income Investors: Target fixed-rate series with narrow discounts (e.g., Series M at $24.80) and strong dividend histories. These offer a balance of yield and stability.
2. For Conservative Investors: Avoid Series N and Y due to their wide discounts and rate reset features. Instead, consider higher-yielding, fixed-rate series with less volatility.
3. For Tactical Investors: Monitor the company's capital structure and redemption announcements. A shift in strategy—such as a new preferred share issuance—could signal which series are at risk of being retired.

In conclusion, Great-West Lifeco's preferred shares present a nuanced opportunity for income investors. While the index exclusion has created discounts, it also underscores the need for careful due diligence. By analyzing the company's capital management history, current market prices, and tax implications, investors can navigate the risks and capitalize on the potential for undervaluation and redemption-driven returns.