Pig in a poke or mas­sive op­por­tu­nity?

Use lower prices of pref­er­ence shares to your ben­e­fit

Finweek English Edition - - Creating wealth - BY VIC DE KLERK vicd@fin­week.co.za

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


Source: I-Net Bridge

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