Analyzing Preference Shares?

[123qwesz]

Preference shares have the features of both bonds and equity.
I'm doing an analysis of preference shares and here's my results:
Charts: HERE


How have the prices changed over the past 12-months and what factors have driven the changes?

Over the past 12- months, there was no significant change in share prices. Notice that OCBC 4.2% stays between 1.00 and 1.05, and there is next to no change with OCBC 5.1%
The lack of change may be because investors and traders do not exchange these shares like the ordinary stock. This is because they hold on to it for the coupon/dividend. One cannot get the coupon if he does not own it. Furthermore, these particular shares are not widely held. Notice the low, low volume. The small fluctuations is just normal buying and selling. There really has not been any significant movement since 2009 after the global financial crisis.


However, I got this reply from my lecturer:
You have only explained the supply and demand factor for preference share which caused fluctuation.
You need also to discuss any other factors that impact the preference share from the debt point of view as well as from the equity point of view.
How else can I improve my answer?

Any help greatly appreciated!

 

[henrylbh]

The trade volume is insignificant except when the market faces a crisis and more dump the shares. So is the price change except may be after xd.

When everything is calm, whether from debt or equity point of view, there is hardly any impact.

There is also hardly any supply or demand to talk about when there is so little buyers and so little sellers.

 

[lzydata]

You need also to discuss any other factors that impact the preference share from the debt point of view as well as from the equity point of view.

Rather than asking somebody on the Internet what your lecturer means, maybe it's better to ask the lecturer himself?

Perhaps he means analysing the nature of these securities and how they may affect price fluctuations. Personally I think the equity aspect matters less as OCBC has not had trouble paying out and so it has effectively acted as a bond.

There was also an earlier issue that OCBC redeemed on the first possible redemption date recently. Based on the current interest rate environment, it is likely they will be able to refinance at lower rates too, so redemption of the rest is also likely. That makes these preference shares all the more like bonds with a fixed and impending maturity date, even though they are technically perpetual.

 

[123qwesz]

Rather than asking somebody on the Internet what your lecturer means, maybe it's better to ask the lecturer himself?

Perhaps he means analysing the nature of these securities and how they may affect price fluctuations. Personally I think the equity aspect matters less as OCBC has not had trouble paying out and so it has effectively acted as a bond.

There was also an earlier issue that OCBC redeemed on the first possible redemption date recently. Based on the current interest rate environment, it is likely they will be able to refinance at lower rates too, so redemption of the rest is also likely. That makes these preference shares all the more like bonds with a fixed and impending maturity date, even though they are technically perpetual.

Thanks for the input!

I just received the e-mail from my lecturer:

I am looking for more specific factors that impact the price movement of the preference stock.


For example, maybe a sudden rise in interest rate or the increased financial diffculties could have caused the preference share price to decline because investors would now demand a higher return on the preference share which pay a fixed dividend.

___

The OCBC Bk 2.4% preference share did not fluctuate much, so what can I mention about the change in price of this preference share?

On the other hand, the OCBC 5.1% Preference share fell from 105 to 103. How do I justify this change?

 

[lzydata]

Is it too late to change your topic? Haha. Seriously, if your assignment is on A-caused-B price fluctuations, maybe preference shares are not a good choice. They are quite thinly traded so the entry or exit of a big buyer or seller can make a big impact on the price, when on other days there aren't even any trades.

 

[123qwesz]

Is it too late to change your topic? Haha. Seriously, if your assignment is on A-caused-B price fluctuations, maybe preference shares are not a good choice. They are quite thinly traded so the entry or exit of a big buyer or seller can make a big impact on the price, when on other days there aren't even any trades.

I would like to, unfortunately, we're tasked to do on OCBC preference shares.

With regard to the OCBC 5.1% Preference share, it fell from 105 to 103 in December 2012.

I managed to find this article: OCBC Preference Shares
that occured on the same date.

Could this piece of news justify the drop in price of the preference share for that date?

 

[henrylbh]

I would like to, unfortunately, we're tasked to do on OCBC preference shares.

With regard to the OCBC 5.1% Preference share, it fell from 105 to 103 in December 2012.

I managed to find this article: OCBC Preference Shares
that occured on the same date.

Could this piece of news justify the drop in price of the preference share for that date?

The price fell from 105 to 102 mainly because it went xd and the news of redemption of earlier ps cause anxiety over the yield to redemption of the 5.1% ps.

 

[123qwesz]

The price fell from 105 to 102 mainly because it went xd and the news of redemption of earlier ps cause anxiety over the yield to redemption of the 5.1% ps.

OMG thanks for this!

Discuss the relationship between the price movements in the 2 bonds and the change in the price of ordinary shares.

Can I just mention that:
These non-cumulative preferred shares are typically riskier than a traditional preferred share and are typically given a lower credit rating. Due to the higher credit rating, these shares are issued at a higher yield which is attractive to fixed-income portfolios or income-oriented investors.

OCBC ordinary and non-cumulative preferred shares may serve their purpose in separate portfolios. For instance, the ordinary shares undergo more turnover and price fluctuations - buying and selling – and are held for capital appreciation. The non-cumulative shares are less favored by investors than preferred shares due to the potential of non-guaranteed past dividends. However, price fluctuations are limited due to the buy and hold mentality as a fixed-income security

 

[henrylbh]

OMG thanks for this!

Discuss the relationship between the price movements in the 2 bonds and the change in the price of ordinary shares.

Can I just mention that:
These non-cumulative preferred shares are typically riskier than a traditional preferred share and are typically given a lower credit rating. Due to the higher credit rating, these shares are issued at a higher yield which is attractive to fixed-income portfolios or income-oriented investors.

OCBC ordinary and non-cumulative preferred shares may serve their purpose in separate portfolios. For instance, the ordinary shares undergo more turnover and price fluctuations - buying and selling – and are held for capital appreciation. The non-cumulative shares are less favored by investors than preferred shares due to the potential of non-guaranteed past dividends. However, price fluctuations are limited due to the buy and hold mentality as a fixed-income security

Dont know what you mean by traditional ps. Whatever, it is almost non existent except may for United Engineers.

Higher credit rating ps are issued at higher yield???

For ps issued by institution with good standing and even though non-cumulative, these are favoured by those who want fixed income and as long as the yield remains within a range, the ps are held for long term. That may explains the low volume of trade. And I guess most of the ps are held by financial institutions, fund mgrs and insurance companies who do not trade in such instrument.

As interest rates are quite stable, there is no reason for the price of ps to fluctuate much. The high will be limited by the yield and risk of redemption. The low will depend on the perceived risk on the issuer or the market turned much risker as in earlier years when the ps dropped to 80c compared to 103 now.

 

[123qwesz]

According to OVERSEA-CHINESE BANKING CORP (OCBC:Singapore): Financial Statements - Businessweek,
the price/earnings ratio relative to the industry is 9.6x.


How do I justify whether or not the price of the share for OCBC is expensive or not?

 

[kEvinErd]

OMG thanks for this!

Discuss the relationship between the price movements in the 2 bonds and the change in the price of ordinary shares.

Can I just mention that:
These non-cumulative preferred shares are typically riskier than a traditional preferred share and are typically given a lower credit rating. Due to the higher credit rating, these shares are issued at a higher yield which is attractive to fixed-income portfolios or income-oriented investors.

OCBC ordinary and non-cumulative preferred shares may serve their purpose in separate portfolios. For instance, the ordinary shares undergo more turnover and price fluctuations - buying and selling – and are held for capital appreciation. The non-cumulative shares are less favored by investors than preferred shares due to the potential of non-guaranteed past dividends. However, price fluctuations are limited due to the buy and hold mentality as a fixed-income security

The qn is about bonds and ordinary shares but your answer speaks only about preferred shares..?

Think to answer the qn, you can try to look at the correlation. Whether is it zero, positive, negative? Strong weak?

 

[123qwesz]

Thanks for the tip!

Using ratios, describe the capital structure of the company. Is this an appropriate capital structure for the company?

Apart from debt servicing ratio and times interest earned ratio, any other ratios are required for this?

 

[henrylbh]

According to OVERSEA-CHINESE BANKING CORP (OCBC:Singapore): Financial Statements - Businessweek,
the price/earnings ratio relative to the industry is 9.6x.


How do I justify whether or not the price of the share for OCBC is expensive or not?

Today, dbs, ocbc and uob closed at 17.70 11.08 and 22 respectively.
Based on last quarterly results, the price earnings ratios are 11.02 14.0 and 12.7 respectively.

Which is expensive, no one can answer cause per is not the only ratio to assess whether the share is expensive. Even taking into account all other ratios, sum of irrationality, prospect and sentiment will determine the price.