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Friday, August 17, 2012

SMC Preferred Shares Offer

DEAR INVESTOR JUAN
IN THE NEWS


Dear Investor Juan,

I'm a frequent reader of your blog. Have you seen these articles?

http://www.interaksyon.com/business/40049/sec-approves-san-miguels-preferred-share-sale

http://business.inquirer.net/76027/sec-approves-san-miguel-preferred-share-offering

It will offer 7.5% to 8% on preferred shares at P75 a par value.

Correct me if I am wrong but this preferred share issue feels more like a bond issue (fixed dividends, has a fixed period etc. etc.) than a stock issue.

I'm doing my own research on these terms cumulative, non-voting, non-participating and non-convertible.

But from what I know preferred shares have priority over common stock if a company goes belly up and they have no voting rights except for situations covered in the penultimate paragraph of section 6 of the corporation code.

Can an ordinary person like me get into this? I'm into UITFs right now and given that this offers a guaranted return I'm tempted to sell my low-yield low-risk UITFs to buy this.

What do you think? Assuming this is available to the public is it a sensible investment?

I hope you can feature this in your blog. San Miguel is one of the most stable blue chips in the country and with a fixed rate of 8% for 10 years this issue beats government 10 year bonds by a pretty sweet margin. I also hope you can help me find out how I can get in on this. As a newbie investor I'm just looking for better yield on my savings just like anybody else.

Thank you.

Randy


Dear Randy,

Details of the issue may be found here.

Thanks for sharing the news with us. You're right, preferred shares are very similar to bonds in that investors receive a fixed and guaranteed (to a degree) periodic income, unlike common stock where dividends are uncertain. The cumulative feature means that any unpaid dividends accumulate and must first be paid by the issuer, in this case San Miguel Corporation (SMC), before it can issue any common stock dividend.

Also, you're right, preferred shareholders have a higher priority claim than common stockholders over the assets of the firm if it goes through bankruptcy proceedings, but lower priority than creditors. Therefore, a direct comparison with corporate bonds isn't exactly appropriate, but for a large and stable firm like SMC it may be practical. So yes, the 7.5% to 8% dividend rate (gross of 10% withholding tax for individuals) seems attractive compared to current corporate bond yields, especially since all taxes and duties applied to dividend payments shall be borne by SMC, according to the offer prospectus above (page 32 under "Taxation"). (EDIT: Dividends paid to individuals (who are Philippine citizens) are subject to 10% withholding tax. Domestic corporations will however receive dividends tax free. Thanks Henry.)

For your other concerns, yes it is available to the public, and yes, I do think it is a sensible investment. You can apply for an allotment through any PSE stock broker like Citisec Online (which has provided me with some valuable information regarding this issue). The minimum investment amount is 37,500 pesos, with additional amounts in multiples of 7,500 pesos. Take note, though, that while the stated last day of the offered period is September 14, 2012, you can only submit your application through Citisec Online until August 22, 2012, 3:30pm.

I hope I was able to sufficiently answer your questions. Good luck!