Stokes family maintains cashflow

Tuesday, April 21st, 2015


Security price: $87.40
Industry: Industrial good
Forecast distribution for 2015: $5.28 per security fully franked

Billionaire Kerry Stokes’s Seven Group Holdings recently announced that son and heir Ryan Stokes would take over as chief executive from Don Voelte.

With Seven facing challenging conditions in its core media and mining-related operations, the market reacted to the news by pushing the share price down.

But despite those challenges, Seven is a well-managed diversified conglomerate controlled by an astute businessman.

Last year, we said Seven Group Holdings shares were a good option for income investors. But there is another option for income investors to get exposure to Seven: the company’s hybrid known as the Transferable Extendable Listed Yield Shares (TELYS4).

They rank ahead of Seven’s ordinary shares and have an attractive grossed up forecast dividend yield of 8.1 per cent.

The TELYS4s were created when Seven Group Limited and WesTrac Group merged to form Seven Group Holdings (SVW). The group rolled over their preference shares to a new structure.

These securities are redeemable, convertible preference shares that entitle holders to a preferred, non-cumulative, floating rate dividend. TELYS4 securities trade on the ASX under the code SVWPA.

SVWPA have a face value of $100 per unit and pay half-yearly dividends in arrears. SVWPA rank behind all creditors but are prioritised ahead of SGH equity holders. They are perpetual securities and have no maturity.

It is also important to note the dividend rate paid by SVWPA is a “floating rate”, in that it is influenced by prevailing cash rates. As cash rates increase, so does the dividend rate, and vice versa.

The dividend rate used in calculating the dividend payment for SVWPA is based on a gross margin of 4.75 per cent (per annum) above the 180-day Bank Bill Swap Rate (BBSW), which sits at about 2.3 per cent.

The effective gross dividend rate for SVWPA is therefore 7.05 per cent, calculated on the current market price of $87.40. This produces a grossed up running yield approaching 8.1 per cent.

Although an investment in SVWPA brings with it more risk on a relative basis, the grossed up yield of about 8.1 per cent compares very favourably to returns being offered by term deposits. They will continue to attract the attention of income focused investors, especially those investing through super fund vehicles.

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