Returns still safe and sound
FOR THE FIRST TIME in about three years, investors in preference shares are able to look down slightly on investors in ordinary shares. Over the past two months – since the last time we discussed this topic – the capital value of preference shares has risen by around 7%, while the value of ordinary shares is down by 5%, according to Sasfin’s Elan Levy, who regularly compiles our table of prefs.
Investors will note it’s still possible to earn just over 10% in the form of a tax-free preference dividend on the preference shares of banks. On companies with a somewhat lower credit rating, a return of more than 13% is still possible. That’s after the prime lending rate, to which the shares’ returns are linked, has already fallen by 150 points.
Investors with some appetite for risk could take a look at Steinhoff’s preference shares. Admittedly, this group operates in the furniture trade and it’s not always easy to understand its financial statements. But when you’re asleep peacefully at night or reclining comfortably on your sofa during the day, remember that both those items of furniture probably come from Steinhoff.
Those with an appetite for foreign risk could look at INPP, Investec’s preference share linked to the Bank of England (BoE) bank rate. The share represents an investment of £10, which earns interest at the BoE rate plus 1% – in other words, 100 points. The BoE rate is currently 1%, plus the premium of 1% means Investec will pay a dividend of 2% of £10, or 20p/share/year. That 20p currently buys R2,86, giving a return of around 10% on the prefs, which currently trade at around R28,75 each on the JSE.
But when sterling was still a strong currency and Britain still had normal interest rates, the price of those shares on the JSE was considerably more than R100 each for quite a long time.
If you believe Britain won’t go bankrupt, that sterling won’t weaken further against the rand: in fact, that the opposite will happen and that the BoE will have to increase its interest rate in about three years’ time to a more realistic 4% or 5%/year, then this is an excellent investment.
It has at times looked as if Investec wasn’t going to make the grade – and, indeed, director Brian Kantor even sold the shares short at R40. After its latest results, which show the group has £4,7bn in cash, its future looks much rosier. But remember: things are now so bad in Britain that anything can happen.
My prediction is that there will still be lots of hard times, but Investec’s prefs look so cheap that a small bet really is called for.