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(Updated to 29/12/2008) 10/11/2008

The preferred actions or participation, those great ones forgotten

The investors we tend to make two great groups, investments with risk (stock market) and without risk (deposits and national debt). He is typical the black and white one when all we know that the product universe is plagued of grays.

Within all these grays, they are the corporative bonds, subordinate debt, preferred stocks or preferred participation (they are called indifferently), futures and options,… Here we are going to see the preferred stocks because they seem to us especially interesting.

In the first place we are going to describe its basic characteristicses:

  • Are titles emitted by a nominal amount and that comprise of the own bottoms of the emitter.
  • They are action because they realize the payment of dividends and they do not have victory.

This dividend is determined to the emission (to variable type of fixed interest or). It annually does not determine the General Meeting like to the ordinary actions.

It is received whenever the company has benefits and has preference in the collection on the dividend of the ordinary actions.

Each company can make manifolds emissions with certain characteristics each that are called series. This is thus because as the market is money changer, when they emit new titles the type of interest on the noun can be different. A company has its series To that a 8% pay on noun, but when to make another emission the types have lowered and to emit new titles it can do paying it a 6%. The company will have this new series B that pays a 6% on noun and the previous A that a 8% pay. This does not mean that there is to buy first, because the normal thing is that its price has raised in stock market and the yield on the price of quote is of 6% (the price of market will be over the noun).

In exchange for these advantages, they do not have right to vote in the General stockholders' meeting. The possesor of these titles is purely a financial investor in the company.

Example. If company XXX has ordinary actions in year 0 quoting to 10 and preferred to 15 (there is no relation between the price of both since they have different nouns) and these last ones they receive an annual dividend of 8%, we imagine that in year 1, by a worsening in the business of XXX the benefit lowers a 50%. It would be very probable that the ordinary actions lowered significantly in stock market; and whatever, because a 50% (to see fundamental analysis) would have sense, mainly if is not expected a recovery in the benefits. Nevertheless the preferred stockholder would continue receiving his 8% reason why its price would have low in stock market.

That it affects then the quote of the preferred stocks:

  • Premium of risk against the assets “without risk?. If the national debt to 30 years (we took this reference because the preferred stocks do not have victory) gives a 5% us of interest we will want at least a 8% for the preferred stocks. That additional t3% are called risk premium and are different for each company and fluctuate according to the expectations of the market.
  • Types of Interest. If the national debt to 30 years were giving a 5% and happens to give 6%, the market will want that the preferred stocks give 9% (6%+3%) for that will have to lower the price of the preferred stocks. If the dividend is of 8% on 10€ (0,80€ by action) and the low price in stock market to 8,89€, the new buyer will have a 9% of dividend 0,80€/8,89€. This is thus because the dividend is determined by title independent of its quote. The old possesor will see lower the price of his preferred stocks, but he will continue receiving an annual 8%. In order to avoid this risk, titles to variable type of interest exist.
  • Possible losses in the company or by the market or the competition that can put in risk its benefit or its solution; credit risk.

These titles in Spain and to a large extent of Europe, are emitted by two routes:

  • Commercial network of Banks and Savings banks in conditions not very advantageous.
  • At institutional level for great investors like Plans of Pensions, Sovereign Investment funds, Bottoms, Insuring,…

On the contrary in stock-market of New York they exist multitude of titles of these characteristics quoted in Dollars and with nouns of $25 what they allow them to be accessible for the great public.

In the present situation of crisis in the markets, in which the risk premiums are shot, they seem an interesting alternative of investment without considering the risk of type of change that we could cover or no. We are going to see in the first place a listing of some of the companies that have emitted these titles in NY stock-market (we can consult them including symbol in the part of above to the right of the NYSE Web) and later will see examples doing to us a question of three companies that well are known: Banco Santander, Repsol and Bank of America.

Company/Name Symbol Noun Price Divid.

Yield

Emission Present
Allianz Series M AZM $25,00  $18,59 $2,08  8.32% 11.19% 
Banco Santander Series A STDPRI  $25,00 $22,92  $1,60  6.40%  6.98%
Bank of America Series and (1) BACPRE  $25,00  $9,52  $1,00  4.00%  10.50%
Capital Cititgroup VII CPRV  $25,00  $15,70  $1,80  7.20%  11.46%
Deutsche Bank CAP Fdg Tr X DCE  $25,00 $14,48  $1,84  7.36%  12.71%
General Electric CAP Series C GEC  $25,00 $21,19  $1,52  6.08%  7.17%
Georgia Power Series W GPW  $25,00  $23,16  $1,44  5.76%  6.22%
Goldman Sachs Series C (1) GSPRC  $25,00 $12,71  $1,00  4.00%  7.87%
HSBC Series A HBCPRA  $25,00 $17,70  $1,56  6.24%  8.81%
JPMorgan Chase CAP XIX JPMPRS  $25,00 $21,35  $1,64  6.56%  7.68%
Metlife Series To (1) METPRA  $25,00 $12,30  $1,00  4.00%  8.13%
Inc. Nexen Series B NXYPRB  $25,00  $16,65  $1,84  7.36%  11.05%
Repsol Series A REPPRA  $25,00  $19,65  $1,88  7.52%  9.57%
Royal Bank of Scotland Series H RBSPRH  $25,00  $8,13  $1,80  7.20%  22.14%
Xcel Energy Inc. XCJ  $25,00  $24,85  $1,92  7.68%  7.73%

(1) Emissions to variable type Libor USD 3m with a minimum of 4.0%

Investing in action of Banco Santander you would be satisfied to an annual 7.68%?

Because it buys preferred stocks of quoted Banco Santander Series I in stock-market of New York with the following characteristics:

  • Noun $25
  • Annual dividend $1.60 (6.40% on noun)
  • Present price $20,89
  • Quarterly payments the 11 of March, June, September and December

The annual dividend that we would receive would be of 1.60/20.89=7.68%. When they were emitted a 1.60/25=6.40% paid but since they have lowered of price our yield raises.

Investing in action of Repsol you would be satisfied to an annual 9.43%?

Because it buys preferred stocks of Repsol Series To quoted in stock-market of New York with the following characteristics:

  • Noun $25
  • Annual dividend $1.88 (7.52% on noun)
  • Present price $19,75
  • Quarterly payments the 30 of March, June, September and December

The annual dividend that we would receive would be of 1.88/19.75=9.43%. When they were emitted a 1.88/25=7.52% paid but since they have lowered of price our yield raises.

Investing in action of Bank of America you would be satisfied to an annual 9.94%?

Because of America buys preferred stocks of Bank Series and quoted in stock-market of New York with the following characteristics:

  • Noun $25
  • Annual dividend $1.00 (Libor$3m+0.35% minimum 4.00%)
  • Present price $10,30
  • Quarterly payments the 15 of February, May, August and November

The annual dividend that we would receive would be of 1.00/10.30=9.94%. When they were emitted paid variable coupon, now the types have lowered much and are paying the minimum of 4%, but they quote very below the noun to compensate. In this case in addition we took advantage to possible future ascents types, if they raised 6%, we would receive 6,35%*25=1,59$ by preferred stock that on our price of purchase of $10,30sería a 1.59/10.30=15.44% yield. 

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