Opinions on preference shares

[vurt]

I'd just like to get a few opinions on preference shares at the moment in terms of a lower risk investment over the next 1-2 years. I'm considering collecting a few at the moment and my reasoning is as follows...

Since the value of the preference share is the dividend it returns, the price of the share is determined by both the dividend and the required rate of return by the investor. The required rate is linked to inflation, interest rates, etc...

Currently, inflation and interest rates are quite high. I see that some of the more liquid preference shares are returning a 12-14% dividend yield. At the moment, we're possibly starting to see a slow down in inflation and interest rates may come down over the next year. With the possible decrease in inflation and interest rates, the price of these preference shares will most likely rise.

So, assuming that 1) the banks are still around, 2) still issue dividends at their historic returns, 3) interest and inflation goes down over the next year .... what I think I see is a possibility to invest in a lower risk, high dividend yield investment at a low price, with a small potential capital gain in the medium term when interest rates drop.

Any opinions?

[SimonPB]

pref shares should trade at the loan value plus accrued interest. So SBPP with a loan value of R100 should be at around R103 at the moment. But as they trade free this isn;t happening with any of them. Further as interest rates drop the yield will fall off and this will potentially see selling pushing the prices down?

[DST]

Yes Vurt, Simon has stated the key point which is the likely drop in payouts. Most of the prefs are formulaically linked to prime rate, at say 70% or 75% of prime on the nominal value (R100, typically). Hence if your thinking pans out and prime drops, so too will the prefs' divvy - with a time lag. As such, less attractive to hold. Having said that, note that the prefs typically slid while their yield rose during the recent rate rise phase, so supply>demand spoke loudest. ps is your surname Konnegat?

[#4]

Hah! Konnegat. Good one, dude.

[vurt]

Ah, yes. Thanks for that, Simon and DST. I had missed that important point.

[Mighty_Mouse]

Saw your query, this input may assist: The linked Prefs were talked up a lot in articles in the fin mags, and I ventured into some - its best to do your homework, as some are cumulative and others non cumulative. The risk with them is that a company may decide to not distribute, so the banks tend to be traded more, possibly seen as less risky etc However, for example, Grindrod Prefs (cumulative) are down considerably, so the return, at least in the short term, is attractive, but they should really be trading at around R95 (currently in the eighties)So its a case of demand and supply - best is to create a table covering the linked prefs, then look at the last divi to work out a rough return.(remember that the % distribution is based on the nominal value, not the current trading price) Hope this helps