Wednesday, August 28th, 2019
The significant compression of already historically low interest rates across many developed markets, including Australia, has left many investors scrambling for access to lower risk sources of sustainable income. This further enhances the relative attractiveness of good quality, higher-yielding opportunities listed on the ASX.
In our view, one such opportunity is apparent in the preference shares of Ramsay Health Care (ASX: RHC). Established in Sydney in 1964, the company today delivers a range of acute and primary healthcare services from 480 facilities across 11 countries, making it one of the largest and most diverse private healthcare companies in the world. This includes market leading positions in its core geographies of Australia, France and Scandinavia.
While we see little margin of safety in the head stock of Ramsay at current prices, a higher-yielding alternative for investors seeking exposure to the company is via its Convertible Adjustable Rate Equity Securities (CARES), which trade on the ASX under the code RHCPA. With a sound track record of income generation, coupled with low volatility, RHCPA has been a long term holding within Clime’s strongly performing Australian Income Fund.
RHCPA is a preferred share and as such, is ranked ahead of ordinary RHC shares. RHCPA pay fully franked, semi-annual preferred dividends biannually. More specifically, RHCPA are redeemable, convertible preference shares that entitle holders to a dividend of 4.85 per cent over the 180-day bank bill swap rate (BBSW), which is currently 1.05 per cent.
RHC is due to report its full year results to the ASX on 29 August 2019, at which point we expect the preference share dividend to also be declared. With the BBSW currently tracking at 1.05 per cent, we expect the annualised grossed-up dividend yield to approximate 5.5 per cent over the coming year.
While not a bargain, a steady and relatively high yield coupled with a lower level of volatility suggests RHCPA is well worthy of consideration for more income focused investors.
Clime Group holds RHCPA.