Thursday, 19 April 2012

Portfolio Buy: Lloyds Banking Group 6.475% Non-Cum Pref Shares (LLPE)

Is it time to live a bit dangerously? That what the latest portfolio purchase would imply.

LLPE is one of the slightly jumbled (and confusing) collection of Lloyds Banking Group securities. This particular flavour is a non-cumulative preference share with a coupon of 6.475% (paid in two installments each year).  At the current price that translates to a yield of nearly 9%. That reflects the risk of buying into a bank that is currently propped up by the UK Taxpayer.

This purchase is in line with my New Year's resolution to put more 'fixed-interest' in my portfolio. Not because I don't like high-yield dividend shares - but these have been disappointing recently. Also LLPE will arguably provide a better overall return than most dividend shares. If it doesn't go 'poof' and disappear, with the rest of Lloyds.

LLPE was originally a conversion from HBOS 6.475% prefs. Dividend payments have only recently been resumed.

Most  readers will be familiar with preference shares - it's like an ordinary share but with a fixed coupon. The dividend can be stopped under certain circumstances and, because this is 'non-cumulative' you won't get it back, until the bank decides to start paying it again (if ever). On the plus side, preference shares usually rank a bit higher in the pecking order when it all goes pear-shaped - but not by much.

LLPE is easy to trade, with no minimum quantity.

Like many fixed-income securities, there is a call option on the shares on 15 March 2024. If they were repaid at par on the due date this would be a 'plus' as they are trading below par: the capital appreciation would be worth something like an extra 1.5% per annum at the current time. The issuer is not obligated to redeem the shares at the call date; a 'call' is likely if interest rates have dropped and they can save money by calling the existing prefs and selling a new batch paying lower rates. So, depending on prevailing interest rates, these prefs might continue to trade for years after the call date.

So buy, sit back and collect the income for the next 12 years - or more! If you're lucky.

But this is definitely not one for novice investors - before you think about something like this you will need a fairly mature and diversified portfolio of savings and investments.

[Purchase price 74.5p]


I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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