Hyflux Preference Share

There are quite a number of preference shares listed in Singapore stock exchange. Most of these are related to our local banks that need to shore up their capital to meet the tougher capital requirements under Basel III. The recent Hyflux preference share at 6% is a pleasant surprise. I thought that it would have been cheaper for Hyflux to raise capital through debts in this low interest environment.

Anyway, 6% cummulative preference share with step up to 8% feature in 2018 is very attractive. Nevertheless, all investments come with certain risks and it is very important to read and understand the risks associated with this preference share as presented in the prospectus. In addition, when investing in a preference share, we should also consider the following factors:

1) The sustainability of the issuer's dividend policy and its ability to pay dividends in the future.

At the moment, Hyflux's dividend policy is targetted at a payout ratio of 15%. It has been paying dividends since 2004 and the payout ratio is currently more than 30%. With interest cover ratio of 7 times and S$222 million in cash, there is no reason to believe that this dividend policy will not continue in the near future. Furthermore, with its existing projects in the pipeline including the water purchase agreement with PUB, there is no reason to doubt the sustainabiliity of this dividend policy. Finally, given that preference share holders will be paid dividends before ordinary share holders, the preference share holders should be able to receive the regular dividends if there are no surprises. The cumulative nature of this issue makes the deal even more attractive. If for some reason that its business were to be affected and no dividend could be distributed for certain years, the preference shareholders will still be able to receive the dividend accumulated over the years when the company decides to pay dividend at a later year.


2) Market interest rate

Nevertheless, preference shares are sensitive to market interest rate. In times of rising interest rates, preference shares tend to lose value. As our interest rate is now at rock bottom, there is almost 100% chance that we will see higher interest rate in the coming future.


3) Market liquidity

And, if you look at the volume of most preference shares traded over the Singapore stock exchange, you will realize that they are not very liquid. When you need to sell the preference shares for cash, there is a risk that you may have to sell at an unfavorable price.


That's all, folks. Happy investing.



Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.