The Show Must Go On

What a hectic fortnight! With the left-wing in the ANC finally taking control of the organization with Mbeki’s resignation as South Africa’s president, under pressure from Zuma’s left-wing buddies, I believe the Rand and JSE will remain under pressure over the next 18 months. The good news this week was that the PPI increased by a modest 0.2% in August 2008. The bad news is that it’s standing at a whopping 19.1%. Ouch! But with the comrades’ red flag waving high in government, I don’t believe we are in for any interest rate increases by Tito Mboweni for at least 6 months, even if inflation jumps with another full percent.

Everybody was shocked at how fast Mbeki was kicked out of government, and at the timing of it – amid a global financial crises. This was followed by the resignation of several ministers loyal to him. Some who’s political careers are nearing the end anyways, like Alec Erwin. I guess it’s better to go out with some fireworks, and controversy, than facing the embarrassment of not getting a post in the new government after next year’s elections. Some we weren’t going to miss at all, such as the aforementioned, which brought us legendary hits like “Darkcity”, or better known as “Mzansi Without Power”. Some, like Trevor Maneul and Tito Mboweni (yes, I know I’m most likely standing in my own little corner adding him to the my-favorites list – but I have my reasons), we feared that should they leave, large parts of government will collapse into a state of total anarchy, and any hope of a seamless continuation of policy lost forever.

At least the fact that we would’ve had 3 new presidents in 6 months, should reassure the international community that South Africa won’t have a dictator anytime soon. It should also silence the skeptics that South Africa is the next Zimbabwe. Yeah right! The competition in the ANC for the post of president is way too intense for a Mugabe-like figure to rule for a second longer than his allotted 8 years. Hey, come to think of it, South Africa has not had one president that completed his second 4 year term. Now that’s what I call democracy! The only aspect that smells of a Zimbabwe land-grab  stink, is the notorious Expropriation Bill. This ugly anti-capitalist piece of legislation has been shelved for the time being, while the ANC is gearing up for the 2009 elections. But it’s still lurking as the precious ring of Mordor in the dark basements of government, that will bestow it with the ultimate power to confiscate and hand out any property, without having to answer to a court of law. What any corrupt politician won’t give to wield such a  wonderful tool to hand out property at free will to his confidants.

Kgalema Motlanthe was appointed interim president. Although he is a left leaning comrade, coming from the trade union side, he looks like a humble (well, probably as humble as a big shot politician can be), and diplomatic person. Exactly the kind of leader we need to massage the current government pain points, until Zuma takes over. Or might he attempt to win the hearts and minds of his party and people by next year’s election? I’ve already read in The Sunday Times that in some quarters he is more popular than Zuma. It will be interesting to see how this suspense drama plays out: I can already see a new wave of infighting as Motlanthe maneuvers to compete with Zuma for president.

With the local and international scene churning out one new catastrophe after the other, I definitely urge those of you who haven’t invested in gold to do so urgently. And I’m definitely more in favor of actual gold, rather than gold stocks. I’m not saying sell all your stocks and buy only gold coins to hide under the mattress, but I definitely recommend allocating about 10% of your portfolio in the ultra cool, ultra liquid, New Gold ETF, listed on the JSE. The wonderfully Rand denominated gold ETF, will insure you against negative movements in the dollar, and Rand. Wow! Two for the price of one. What a bargain.

As I’ve mentioned, South African stocks will remain under pressure amid all the uncertainty, especially as far as capital growth is concerned. I believe it’s definitely the time of more defensive, good dividend paying stocks.

Hey, talking of good dividends; definitely take a look at preference shares. Most stocks bought an sold are “ordinary shares”. These stocks have have no maturity (expiry) date. Meaning they exist in perpetuity, or well, at least until the company goes bankrupt. Ordinary shareholders have a proportional claim to the income and assets of the company after the company’s met all its obligations to creditors and preference shareholders. So you’re last in line should a company go bankrupt, and its assets sold off to pay its outstanding debt. New ordinary shares can’t be issued, unless you’re offered the first “right” to take up more shares in the same proportion as your current ownership. You also have the right to vote on various resolutions at company annual general meetings. Although for small investors, such as myself, this really doesn’t matter since we usually own so few shares that it’s not going to make any difference whether we vote or not.

This brings us to preference shares, or preferred stocks. This type of share is a combination of equity and debt, issued with a “guaranteed” percentage dividend. You buy and sell these stocks just like normal shares, but you don’t get any voting rights. However you are first in the shareholder line when it comes to dividends, and claims. This means that should a company declare a dividend, preferred shareholders must get a dividend, before ordinary shareholders get their share of the dividend.

They also have other benefits, such as that the dividends are tax free, unlike dividends on ordinary shares, and the dividend amount is based on a ratio of the prime interest rate. The net effect of this is that they actually pay larger dividends as the prime interest rate increases, yet the actual share price comes down, just like normal shares do in a higher interest rate environment. But watch out, you do not nearly get the same price appreciation with preferred stocks, that you get with ordinary shares. Preferred stocks are also less liquid than ordinary shares.

The different types of preferred stock

Cumulative preference shares:
In the event of a company being unable to pay preference share dividends in a particular financial year, the amount of these “unpaid” dividends will be paid in subsequent years when results allow. These types of preference shares are my favorites. On the JSE it’s mostly the non-banks’ preference shares that are cumulative. Although there are exceptions, such as ABIL’s preference share which is in fact cumulative.

Non-cumulative preference shares:
In the event of a company being unable to pay preference share dividends in a particular year, the holder of a non-cumulative preference share forfeits the right to this dividend. The majority of the banks on the JSE have this kind of preference share.

Redeemable preference shares:
A redeemable preference share is issued with the provision that the company will be able to redeem this share at some future date. This means the company will be able to “buy” these shares back and remove them from circulation.

Convertible preference shares:
These shares can be converted to ordinary shares, at a specified or unspecified time in the future. The Sasol Inzalo shares will be converted to ordinary Sasol shares, after 10 years.

Participating preference shares:
These shares get both the preferred dividend, and the ordinary dividend.

In future posts I’ll cover the characteristics of individual preferred stocks on the JSE. But that’s it for now. Have a wonderful week!

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