Hi @J_Westlock, Well that’s a bit strange, anyway I have copied and pasted the text below. If you have specific questions after that then just ask…
Regarding preference shares there is much to tell, I guess some of the key points are as follows:-
- Preference shares are a fixed interest type of investment, akin to a bond, and so have some different characteristics to ordinary shares (equities).
- They pay a coupon rather than a dividend, different name but much the same thing. But with preference shares the amount of the coupon is defined as part of the product. Eg NWBD is a 9% NatWest preference share. The 9% defines the amount of the coupon that an investor receives as a proportion of the “par” value, the price the preference share was originally issued at. For most prefs this is 100p. So NWBD pays out 9p in coupons over the year. Most prefs pay their coupon in two equal half yearly payments, though a few pay in four equal quarterly payments. So NWBD (a 9% pref) pays out 2 x 4.5p coupons at half yearly intervals and RAVP (a 12% pref) pays out 4 x 3p coupons quarterly.
- Unlike equities the amount of the coupon can NEVER be varied as it forms part of the product as do the coupon payment timings. Companies can’t declare different coupons for prefs as they do with dividends for equities.
4.Prefs come in several forms:-
a. Cumulative or Non-cumulative. In theory a non cumulative pref can withhold coupon payments if the company is not in a financial position to be able to pay them. A cumulative pref can skip a coupon payment but if it does it must make up the missed payment at a later payment date.
b. Irredeemable/Redeemable. Redeemable prefs have an end date rather like a bond at which time holders are typically repaid at par and coupon payments cease. Irredeemable prefs have no such end date and in theory once you own them payments go on forever.
- Some prefs have “must pay” clauses built into their prospectus. Eg NWBD has such a clause which says if the company ever decides not to pay the coupon for any reason then they have to issue the holders additional preference shares to a value of 4/3 of the amount of the missed coupon.
- You should also know that a company cannot pay a dividend on their ordinary shares if they withhold the coupon on their preference shares. The net result of such clauses is that the companies tend to always pay the coupon on their prefs.
- All prefs have a prospectus which is a document expressed in highly technical legal language which defines all of the characteristics of the preference share.
- While prefs are initially issued at par they are traded on the stock market (like bonds) and their price can rise above par and fall below it. Reliable prefs paying high coupons are (were ?) much sought after and prices in recent years soared way above par. For example LLPC a 9.25% Lloyds preference share that I held was priced at about 175p in March 2018. I bought most of mine for less than 100p way back around 2012.
- Prefs are sensitive to the prevailing level of interest rates. As rates go up prices fall and the yield increases, if rates fall then prices rise and the yield decreases. In this respect they behave like bonds.
- Like ordinary shares prefs have a bid and offer price. The prices typically quoted on most financial sites is referred to as the “official spread” and it is typically quite large, normally about the amount of a half yearly dividend payment. In actuality though if you do dummy buy and sell, trades on a pref you will often find that the actual buy and sell figures are considerably inside the official spread. But prefs are generally considered illiquid investments and some are traded relatively infrequently and hence the large spreads.
- Be aware that liquidity can be a significant issue particularly when selling any of the smaller pref issues. I have never had a problem buying however many I wanted, but have frequently had problems selling. You may find that you cannot sell your entire holding and may be limited to selling no more than X shares on any given day. But this can change day to day. It can be annoying though.
- Personally I always thought that the best time to buy prefs was on the XD date. On that date the offer price drops by close to the dividend amount, allowing you to buy more shares for the same amount and increasing your yield. You just have to then wait 6 months to receive your first coupon payment.
- Investing in prefs of smaller companies can be a risky business. If the company goes out of business then you will likely be looking at a total loss. Personally I wouldn’t invest in such issues.
At this point I should provide a brief summary of the disastrous events that happened in the preference share world in March 2018. In their results presentation in early March 2018 Aviva made a statement to the effect that they intended to cancel all their preference shares at par and cease paying the coupons. They said that they had received legal advice saying that this was a valid interpretation of the wording in their pref prospectuses. As most other preference share prospectuses contained similar if not identical wording this caused panic in the preference share universe and prices of pretty well all preference shares collapsed.
There followed an extended campaign led by Mark Taber (of the fixed income investor website) supported by a number of major corporate holders of preference shares. Eventually Aviva were forced to back down, but the preference share world has not recovered, prices remain depressed and the cancellation threat potentially remains. Raven Russia are the only company that I know of that have modified their articles of association to explicitly remove the cancellation threat though Aviva has said in its retraction that it will not cancel its preference shares at par in future but would pay “fair market value” if it did so.
See the following links for more detail:-
https://www.aviva.com/newsroom/news-rel … ce-shares/
https://www.telegraph.co.uk/investing/s … 4m-payout/
Now the cancellation threat is less of an issue if you have only paid ~115p for your prefs but if you are holding them in your portfolio at ~175p and might only get paid closer to 100p for them that’s a different order of magnitude of problem.
Now to my knowledge this whole cancellation issue has never been tested in court and it it were it may be that it would not succeed. But then again those holding Lloyds ECNs (these are not prefs but are similar fixed interest products) did raise a legal challenge to their redemption by Lloyds and they lost their case and their income from those investments.
So what I had thought to be a pretty ironclad asset class providing excellent income and security has to my mind been severely damaged by these events. Most of the leading preference shares continue to trade but at much lower prices than prior to March 2018.
So I would say that you need to think very carefully if you are prepared to invest in this asset class under the circumstances that currently prevail. I have personally decided that I will, but will only purchase prefs which are on offer at low asking prices to help avoid the risk of capital loss should the cancellation issue raise its head again.
The preference shares that I currently hold are as follows:-
a) BWSA, Bristol & West 8.125% pref shares
b) GACB, General Accident plc 7 7/8% cumulative irredeemable pref shares
c) RSAB, RSA Insurance Group 7 3/8% cumulative pref shares
d) STAB, Standard Chartered plc 7 3/8% non-cumulative irredeemable pref shares
e) RAVP, Raven Property Group cumulative pref shares.
I bought a) to d) when they were all available for around 115p around November 2018. Most have since increased in price since then with the exception of STAB. RAVP is the one preference share that I am aware of that has amended its articles of association to eliminate the cancellation threat. I have decided that I will NOT buy some of the big names like LLPC, NWBD and SAN which are still trading at 140p and above.
One other big name is worthy of a mention I guess, that being ELLA (Ecclesiastical Insurance). I believe that they issued a statement at the time of Aviva cancellation issue saying that they had no plans to cancel their prefs. And being that they are really the Church of England one would hope that they can be trusted to deal fairly with their investors !.
Well I have probably been wittering on about this for far too long now. I believe that the information that I have provided is correct (gleaned over my many years of holding prefs) but I cannot ABSOLUTELY guarantee it and you should definitely do your own due diligence should you consider investing.
This post is not intended as any form of financial advice and if you choose to invest then you do so totally at your own risk.