Re­turns still safe and sound

Finweek English Edition - - Creating Wealth - VIC DE KLERK vicd@fin­

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.

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