Preference shares in 2007

A horrible year - but might 2008 be worse still?

I noticed this broker list of UK preference share performance in 2007. The first number is the fall in the offer price between 3rd Jan 2007 and 14th Jan 2008; the second number is the yield at today’s offer price.

Abbey National 10 3/8% pref -13.3% 7.03%
Aviva 8.75% pref -13.4% 6.90%
General Accident 8.875% pref -14.6% 7.03%
HBOS 9.25% -17.2% 7.16%
HBOS 9.75% -17.1% 7.16%
Investec Floating Rate pref -10.9% 8.25%
National Westminster 9% pref -17.7% 7.12%

Britannia Building Soc 13% PIBS -18.1% 7.18%
Coventry Building Soc 12.125% PIBS -13.4% 7.00%
Halifax 9.375% sub. bonds -19.1% 7.02%
West Bromwich 6.15% PIBS -11% 6.97%

The first thing to note is that if UK inflation really equals the Bank of England’s 2 per cent target over the long run then these prefs offer a 5 per cent real return. That is quite attractive.

The second thing to note is that they are all issued by financials. I’m not too worried about any of these companies going bust. But I do think it is almost certain that, in the wake of Northern Rock, there will be legislation that makes bank subordinated debt far more risky.

I’m quite interested in these prefs on a five-year investment horizon, but I think I’ll wait and see what happens when bank insolvency legislation is passed.

January 15, 2008 | Filed Under Companies

 

Comments

2 Responses to “Preference shares in 2007”

  1. Ade Roberts on January 16th, 2008 1:22 pm

    With rising commodity and food prices and also wage growth, I am not so sure that inflation in the next 5 years will be as subdued as the recent past.

  2. The Analyst on January 17th, 2008 10:38 am

    Inflation is clearly a concern - the long index-linked gilt is pricing in breakeven RPI inflation of 3.5 per cent. On the other hand, we seem to be past the peak in this interest rate cycle.

    Another factor with prefs is that the income is taxed as dividends rather than interest. You pay 10 per cent if you are a UK basic rate taxpayer and 32.5 per cent at the higher rate. So there are some safe haven attractions for private investors given that the market seems to be going to hell at the moment…

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