Pig in a poke or massive opportunity?
Use lower prices of preference shares to your benefit
THE PRICES OF LISTED preference shares have fallen a lot more over the past few weeks and so-called tax-free returns of between 10% and 10,5% are now generally available on those shares. That’s at least 2% higher than interest investments, which are of course fully taxable. This strange anomaly in the market can be largely attributed to the uncertainty surrounding the changeover from secondary tax on companies (STC) to tax on dividends, which was announced in this year’s Budget.
In a report addressed to potential investors in preference shares, Coronation Asset Managers CEO Thys du Toit says that most issuers of such shares, which include SA’s leading banks, have indicated that they’ll compensate investors for the proposed 10% dividend tax that’s to replace STC.
But there are two conditions: first, they’re going to wait and see what the draft legislation dealing with this proposed change looks like; second, they say that the articles of association of the companies have to be amended before a higher dividend can be declared. That amendment has to be approved by the ordinary shareholders of the issuing company, not by the preferential shareholders. So someone else may have to decide about your benefit, but to his detriment – and, as you know, in a situation such as that you can’t trust anyone.
Perhaps that’s the reason why the prices of those preference shares are again so poor. Du Toit says that the returns on the investments (preference shares) have risen by about 1%, which in effect makes up for the result of the change in tax legislation. In the event of a more positive result, that could be a good investment opportunity.
He says that the prices of preference shares have already fallen so far that the current higher return already makes full allowance for the fact that issuers may decide – due to various loopholes – not to pass the benefit they receive on to shareholders.
If the opposite were true – and we’ll probably only know that by year-end – the prices of those preference shares could again easily rise by 10%. Along with the dividend income of 10% or more over the next year, those underachievers of the past year hold great promise – and it’s clearly not a good idea to sell them now.
To rub some balm into the wounds of investors’ disappointment in preference shares over the past year or so, Coronation is now offering investors the opportunity to convert their preference shares directly and without commission into Coronation’s Preference Share Fund.
That fund has investments in nearly all the issued preference shares and therefore gives investors the benefit of immediately having the good distribution that would be difficult to achieve yourself by buying a few shares in each of the issues. The fund also pays a quarterly dividend rather than every six months, as a direct investment in preference shares does.
Du Toit also says that most investors in preference shares are currently showing a capital loss. That’s especially because most of the shares have in fact just declared their dividends for the past six months. By exchanging shares for an interest in their fund, investors create a capital loss in their portfolios, which can in turn be useful in offsetting possible realised capital gains on other investments.
Most investors in prefs are showing a loss. Thys du Toit