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Preference Shares v Ordinary

Gilts, bonds, and interest-bearing shares
GrandOiseau
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Preference Shares v Ordinary

#302522

Postby GrandOiseau » April 22nd, 2020, 5:57 pm

Would it be fair to say if you are investing for growth or picking value shares you should buy ordinary.

If you are investing purely for income you would buy Prefs?

Reasons for not buying Prefs for income are? Or in general?

dealtn
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Re: Preference Shares v Ordinary

#302525

Postby dealtn » April 22nd, 2020, 6:00 pm

GrandOiseau wrote:
Reasons for not buying Prefs for income are? Or in general?


Inflation

OwenSwansea
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Re: Preference Shares v Ordinary

#302528

Postby OwenSwansea » April 22nd, 2020, 6:16 pm

If inflation is your concern, one can reinvest the relatively high yields on Preference Shares in more Preference Shares. Compound interest at 7% per annum doubles your capital every 10 years. This is good enough for me.

Owen.

dealtn
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Re: Preference Shares v Ordinary

#302531

Postby dealtn » April 22nd, 2020, 6:28 pm

OwenSwansea wrote:If inflation is your concern, one can reinvest the relatively high yields on Preference Shares in more Preference Shares. Compound interest at 7% per annum doubles your capital every 10 years. This is good enough for me.

Owen.


Reinvesting all your income isn't exactly an income strategy though, and what was proposed by the OP was "investing purely for income..."

Alaric
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Re: Preference Shares v Ordinary

#302537

Postby Alaric » April 22nd, 2020, 7:13 pm

dealtn wrote:Reinvesting all your income isn't exactly an income strategy though, and what was proposed by the OP was "investing purely for income..."


I think the idea would be that you take around half in income and reinvest the balance. So you might end up taking a 4% return against 8% possible, much the same as if you had invested in something with a lower yield but growth prospects. The following year you get a slightly higher income from the additional shares or bonds that you bought. Dealing costs would erode returns though.

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Re: Preference Shares v Ordinary

#302538

Postby hiriskpaul » April 22nd, 2020, 7:19 pm

GrandOiseau wrote:Would it be fair to say if you are investing for growth or picking value shares you should buy ordinary.

If you are investing purely for income you would buy Prefs?

Reasons for not buying Prefs for income are? Or in general?

I bought most of my prefs shortly after the banking crisis and definitely had growth/recovery in mind, but that growth included the high dividend stream. I really only invest with total return in mind, so the fact that prefs have a high yield is incidental. I have held a lot of prefs for far longer than I really was expecting to though when I originally bought. I would have a CGT problem if I sold the lot, but I also find prefs to be good diversifiers.

Other people may have income in mind though, so I don't think there is necessarily a clear cut answer to your question - it depends on the investor.

It has been quite a few years since I bought any ordinary shares. Too time consuming. I prefer to cover equity markets using ETFs.

OwenSwansea
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Re: Preference Shares v Ordinary

#302540

Postby OwenSwansea » April 22nd, 2020, 7:23 pm

I am certainly relieved that 75% of my portfolio is invested in Preference Shares in the current circumstances in which we find ourselves.

Owen.

Padders72
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Re: Preference Shares v Ordinary

#302543

Postby Padders72 » April 22nd, 2020, 7:53 pm

There can also be capital appreciation with FI too if bought at the right time and now may not be a bad time. At one point a few years back I was at around 80% in prefs/bonds, the usual suspects all bought at lower rates than today but I got nervous and have now diversified down to around 50% with the rest a mix of funds, ords and most recently ITs (thanks TLF), a lot of which was funded by the dependable high yields the FI investments gave me. I can't really understand the attitude some seem to have on here that the strict HYP approach is the only way to secure a decent income. If I were starting to invest today, high yielding FTSE ords wouldn't be my first choice since there are so few left and many of those have dividend levels under threat. A balanced approach makes most sense to me and reliable fixed income instruments with a healthy yield would be included in that.

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Re: Preference Shares v Ordinary

#302545

Postby 88V8 » April 22nd, 2020, 8:13 pm

GrandOiseau wrote:If you are investing purely for income you would buy Prefs?
Reasons for not buying Prefs for income are? Or in general?


A general reason is that there's not so much price upside now. The time to buy was 3/4 weeks ago. More growth to come in ords.

Another general reason is that it's mostly Financials. Lack of sectoral diversity.

Otherwise, yes, inflation but also age.
Even at 2-3% inflation can be damaging, but I am old enough that I don't really care. I'm happy with the reliability of the income. None of my Prefs has failed to pay nor I do expect any failures.

If you're in your 40s, say, I'd steer clear. Leave Prefs for a decade or three.

V8

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Re: Preference Shares v Ordinary

#302610

Postby GrandOiseau » April 23rd, 2020, 9:28 am

The dividends are fixed right?

Fixed ad infinitum?

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Re: Preference Shares v Ordinary

#302614

Postby dealtn » April 23rd, 2020, 9:38 am

GrandOiseau wrote:The dividends are fixed right?

Fixed ad infinitum?


Well ad infinitum is, shall we say, a very long time. The answer is "no". There are scenarios where the payment could increase, and those where it will decrease (to zero).

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Re: Preference Shares v Ordinary

#302619

Postby OwenSwansea » April 23rd, 2020, 9:59 am

Preference Shares have a fixed rate of dividend, and most of them are cumulative. Where they are not cumulative the situation is even better in that the Company failing to pay a dividend has to issue additional shares on a punitive basis, eg. 4 for 3.

Owen.

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Re: Preference Shares v Ordinary

#302623

Postby 88V8 » April 23rd, 2020, 10:12 am

dealtn wrote:
GrandOiseau wrote:The dividends are fixed right?

Fixed ad infinitum?


Well ad infinitum is, shall we say, a very long time. The answer is "no". There are scenarios where the payment could increase, and those where it will decrease (to zero).


In all normal circumstances you'll get the same cash every year for a given shareholding. That's my default assumption.

There are a few Prefs that have a pusher, whereby if the divi is suspended the holder is given additional shares cost-free as a compensation.
Example NWBD. So that would result in an increase in cash.

And then, if the issuer gets into trouble they could decide to stop the divi. But that could only happen if the divi is also stopped on the ords.
If the Pref is Cumulative, the issuer then has to make good the unpaid divis on the Prefs, and this has to be done before the divis on the ords can be resumed.
If the Pref is non-cumulative. the missed divis do not have to be made good. Which is why there is a price difference between cumulative and non-cumulative Prefs.

And finally there's the risk that the issuer might decide to do an Aviva. In which case the shares could be withdrawn at par and holders would suffer a loss of capital given the shares normally trade above par. Ss an aside, Aviva have said that in 2026 they may look to redeem their Prefs, but after last year's hooha it is now far more likely that they would tender at market value.

V8

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Re: Preference Shares v Ordinary

#302627

Postby Wizard » April 23rd, 2020, 10:29 am

OwenSwansea wrote:Preference Shares have a fixed rate of dividend, and most of them are cumulative. Where they are not cumulative the situation is even better in that the Company failing to pay a dividend has to issue additional shares on a punitive basis, eg. 4 for 3.

Owen.

The two options you outline do not cover all prefs, some can simply stop paying, e.g. LLPC (Lloyds bank prefs). But there are conditions that stop Lloyds paying a dividend on the ordinary shares whilst no paying on the prefs. Also, even if they are cumulative there is no certainty about when missed payments will be recovered, look at RE.B.

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Re: Preference Shares v Ordinary

#302649

Postby OwenSwansea » April 23rd, 2020, 11:33 am

LLPC Lloyd’s Bank Preference Shares do indeed offer the worst of both worlds, as you would expect from Lloyd’s Banking Group.

Owen.

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Re: Preference Shares v Ordinary

#302650

Postby Alaric » April 23rd, 2020, 11:33 am

88V8 wrote: Ss an aside, Aviva have said that in 2026 they may look to redeem their Prefs, but after last year's hooha it is now far more likely that they would tender at market value.


That could apply to all Prefs issued by financial institutions as it was agreed as part of EU Solvency Rules in 2016, that ten years later, Prefs would no longer count in determining a Company's contributions to capital adequacy.

Aviva were rather firmly told to stop disrupting the market in Prefs by claiming the existence of obscure interpretations and their right to use them that would enable them to pay off Pref holders at par.

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Re: Preference Shares v Ordinary

#302704

Postby GoSeigen » April 23rd, 2020, 2:35 pm

88V8 wrote:Ss an aside, Aviva have said that in 2026 they may look to redeem their Prefs,


Would you mind linking to this announcement? None of Aviva's shares (ordinary or preference) are redeemable to the best of my knowledge so this doesn't sound right.

GS

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Re: Preference Shares v Ordinary

#302705

Postby Alaric » April 23rd, 2020, 2:39 pm

GoSeigen wrote: None of Aviva's shares (ordinary or preference) are redeemable to the best of my knowledge so this doesn't sound right.


2026 is supposedly the year in which Preference Shares cease to count for Solvency Capital. Aviva have looked to (insert acceptable word which means repay, replace or pay off [***]) them.

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Re: Preference Shares v Ordinary

#302709

Postby GoSeigen » April 23rd, 2020, 3:07 pm

Alaric wrote:Aviva were rather firmly told to stop disrupting the market in Prefs by claiming the existence of obscure interpretations and their right to use them that would enable them to pay off Pref holders at par.


There is nothing obscure about share capital reductions, they have been in UK Companies Acts since the WWII and probably before. Here is a recent article describing them in detail. A Google search will show that several companies have reduced their capital in recent months.

https://www.mondaq.com/uk/CorporateComm ... -Reduction


The above is maybe a Trumpism: i.e. " obscure interpretations" means the poster himself didn't know very much about capital reduction.

The weird thing about Aviva preference shares is that investors decided that the market price of £1.60+ implied certain things about the rights attached to the shares and that it was far more likely the lawyers reading the terms were wrong than that the market was wrong.


Aviva were strong-armed into backing down, that much is correct.


GS

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Re: Preference Shares v Ordinary

#302714

Postby Alaric » April 23rd, 2020, 3:37 pm

GoSeigen wrote:There is nothing obscure about share capital reductions


All of the regulators, market makers, buyers and sellers believed that Preference Shares didn't convey rights to the issuer of the shares to unilaterally repay them at par, particularly in circumstances where the market believed that a continuing income promise was worth a good deal more. Obscure legal arguments about the meanings of certain words and interpretations never plausibly intended were then deployed by Aviva to claim they could could.


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