I updated my list of the top position and performance and I thought I would add a little explanation about what 5Banc Split Corp. since all the people I have spoken did not fully understand the product.
What's this?
First, FBS is a company that is structured like a mutual fund capital closed trades on the stock exchange. It's a bit between the ETF, the common background and a business. The best way of looking at it is that it is a shell company that invested in the stock market. The aim of BSF is to invest in the 5 largest banks. The weighting for each stock is put in almost 20%, but a slight variance may occur in response to market fluctuations and other factors.
Why is it so special?
Everything is in the ownership structure. There are two groups of owners FBS: preferred shareholders (AP) and shareholders (AO). PAs receive 4.75% per annum, payable quarterly, based on the issue price of the share ($ 10). The AO also receive the remainder of the capital gain. The structure is made so that the ratio AP / AO = 1 at any time. In December 2011, FBS redeem all preferred shares and new issues (the official process is a bit more complicated but the result is not bad in this genre).
The first reaction is to tell the world "You're sick! To pay 4.75% PA, while banks pay a dividend in the 4%". However, FBS is able to pay a dividend of 2.5% currently. Why? Here's the best description I can do:
- Issuance of $ 100M to $ 100M AP and AO.
- $ 200M investment in a portfolio generating returns of 3.8% ($ 7.6 million in dividends per year) or the approximate average dividend yield of Canadian banks [TD (3.2%), RY ( 3.25%), BNS (3.8%), BMO (4.4%) CM (4.6%)]
- Dividend Payment of $ 4.75 million to the PA (or 4.75 million = 4.75% x $ 100M)
- Rest $ 2.85 million available to cover the costs of business operations (approximately $ 500K, or 25 basis points) and pay dividends to AO.
I already hear several start criticizing This product takes the lever on companies that already have the handle (and I speak not even I could purchase the lever in a margin account ...). I can already hear me lecturing the world about the dangers of debt and / or structure such as this. But where is the danger to the AO? For me, it is certain that there is a greater risk that investment in just five banks. But if you think the banks will quietly raise their value and dividends in the coming years (that is, if you think bonds are cushy), add a little lever is interesting in terms of performance.
Also, return on assets is not really 3.8%, but $ 7.6 million per year. The dividend is stable ... whatever the value of assets. To decrease the value of the dividend, should the banks cut theirs. But even in times of crisis, they have not done. If you believe that there is a strong likelihood that banks cut their dividends ... Do not invest in their titles!
I know that Scotia and TD have created many such products (the latter comes from TD Securities), but not all products are interesting. For example, I believe that the risk even companies in the sectors of health and energy are such that adding a additional leverage is dangerous. But for banks ...
I repeat: this title is simply more risky investing in 5 banks. However, the expected return is also larger (the risk-return relationship holds). The risk of leverage is a risk that I know well and that I find preferable to an operational risk for banks.
Fear of leverage
Some say I picking on those who preach about the lack of debt ... they are right! I just do not understand how a person may want to avoid at all costs any form of debt. At a minimum, the debt allows flexibility in the activities Company. And there, beware! I'm not talking about debt at the ceiling all our businesses. I talk to have a reasonable presence of debt to significantly improve the level of yields. The returns can come from the systemic risk of the company and / or financial risk. The idea that I preach is to not think in binary (thus either), but rather to assess the systemic risk of a company and to add financial risk accordingly.
If my argument back in personal finance, not because it is dangerous to have 3 credit cards met, a line of credit being fully utilized, an auto loan and a big mortgage we should avoid all the credit. A mortgage that you know are reasonably able to pay in the foreseeable future is not bad in itself. There is even a tool that allows you to make a project many years ago ... provided that the interest rate charged is lower than your required return.
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