Is there a trade around the IPL DRP?

With its result presentation today IPL announced the recommencement of its Dividend ReInvestment Plan (DRP), offering eligible shareholders the opportunity to reinvest their dividends into IPL shares at a 1.5% discount to the 10 day VWAP commencing 29/11 through to 12/12 inclusive.

The Company also stated that the 2013 Final Dividend will not be underwritten. This is to say, that where the number of investors that choose to take cash rather than shares (via DRP) as their dividend payment. The company will not sell on market the cash equivalent number of shares to effectively covering its cash dividend outlay.

Historically such practices have see declines in the price of a companies shares over the DRP calculation period.

So unlike the Banks which recently decided to BUY back stock issued as DRP. Therefore not diluting cash dividend recipients. IPL has decided to encourage its investors to opt for DRP stock by offering a 1.5% discount to those investors that take scrip over cash.

This is not unusual but clearly indicates the different capital positions of a business from time to time.

Often with discounts to DRPs you will have some investors that will endeavour to improve their cash dividend by trying to capture the discount. They do this by nominating to take DRP stock from the company and during the DRP calculation period sell this stock in advance of receiving it. Thereby getting 1.5% larger dividend.

Example:

Your own 100k shares and a dividend of 10c per share is announced. You can take the cash dividend Or you can take DRP at 1.5% discount. If you take the cash dividend you can receive $10,000 or otherwise you can forward sell your DRP stock during the DRP calculation period at VWAP and receive $10150.

 

 

Wayne Nicholls

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Likely Early Re Classification of WES partially protected shares

For the followers of this blog over the past few weeks I have been discussing the potential for an early reclassification of WESN (WESNDC) into WES (WESDA). A number of positive factors had emerged that were bullish for the Wesfarmers share price which I thought would drive it above the Cap Price of $43.11. If WES could trade at a vwap of greater than $43.11 over 20 days reclassification would occur. Which means that for every WESNDC you would receive 1 WESDA.

Below is an extract from the Wesfarmers partially protected disclosure document.

6. Early Lapse

(a) If the VWAP over any consecutive period of 20 Business Days exceeds the Cap Price at any time prior to the Lapse Date (the Early Lapse Event), then on the Early Lapse Reclassification Date each Partially Protected Share then on Issue shall be Reclassified into one Ordinary Share, and Partially Protected Shareholders shall be removed from the Register in respect of that number of Partially Protected Shares and entered into the register of Ordinary Shareholders in respect of an equal number of Ordinary Shares. The Partially Protected Shareholder will not be entitled to be issued with any additional Ordinary Shares in respect of the Partially Protected Share.

Wesfarmers vwap has been trading above the critical $43.11 price now for 5 days. The last day for 20 consecutive days is 2nd December.

As suggested the WESN (WESNDC) premium has shrunk significantly although it still trades at a small premium.

Unless the share price comes back dramatically, it looks like “good bye” to the partially protected shares.

For the Bears, buying WESN (WESNDC) at a small premium could be a great opportunity as the maximum conversion occurs at $34.32 where you would receive 1.256 Wesfarmers shares for every Wesfarmers partially protected rather than 1:1 as we have currently. The final date for this to occur would be Nov 2015. WES was trading at this level 1 year ago. Very risky but then again your Bears!!

Wayne Nicholls

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Tweet Tweet

Twitter had a very successful debut on the NYSE closing at $44.90 a rise of 72.69% from its IPO offering of $26.

Twitter still runs at a loss, with its IPO filing showing that 65% of its revenue was coming from mobile ads market in Q2. A recent Price Waterhouse Coopers report showed US mobile revenue was up 145% in the US for the first half of 2013 to $3bn. Investors in Twitter will need this type of growth to continue for Twitter justify is $25bn opening market cap.

Twitters first day closing price +73% was more successful than Facebook, Group on , Zynga and Google +18% on debut. But not as strong as LinkedIn +84%.

The US IPO Market has been particularly robust this year with 168 new companies being listed. The best year since 2007 where 213 companies were listed.

A published US IPO Index has shown a 30% return for Q3 IPO listings.

Some of the best performing IPOs in the US this year include Sprouts Farmers Market +122%, Potbelly +119%, Noodles and Co +104%, with LinkedIn and Twitter right up there.

With SP 500 YTD returns at 24%, you would have to say a lot of this IPO money is Hot Money being reinvested after a great year of returns during 2013.

We will have to wait and see if this is just a peak, or just a sign there is so much money in the system anything with potential growth in a hot sector will get demand. Thus the big push to get more IPOs out here on the ASX before Christmas.

There is no doubt all this new found wealth will filter into the broader US economy.

 

Wayne

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Summary of Banks Dividends and DRPs

ANZ,NAB and WBC have now announced their results and dividends. All three will be buying back on market any stock issued as Dividend Re-investment. While ANZ also has a $500m on market share Buy Back.

ANZ

• Dividend 91c fully franked ex div 7th November, payed 16th December
• DRP calculation period (buying) 13/11 to 26/11 approximately 19m share to be bought over the period or 1.35m shares a day, based on 7% DRP take up previous corresponding period.

ANZ Buy Back of $500m managed by UBS is available from 13/11/13 to 31/3/14.

NAB

• Dividend 97c fully franked ex 7th November, payed 18th December
• DRP calculation period (buying) 14/11 to 5/12 approximately 17m shares to be bought over the period or just over 1m shares per day, based on 7% take up previous corresponding period.

WBC

• Dividend 88c fully franked plus 10c fully franked special dividend, both ex 8th November, payed 19th December.
• DRP calculation period ( buying) 18/11 to 6/12 based on other banks 7% DRP take up this would mean 21m shares need to be purchased or 1.4m shares per day.

Wayne Nicholls

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Yield to Yield?

I read with interest (pardon the pun) a number of commentators continuing to recommend the purchase of some high yield shares as a source of ongoing income. Typically discussing the Banks and Telstra. In these discussion they say that investors should take a 5 year view and not be overly concerned with the strong recent share price moves, as the yields on these shares are so attractive on a fully franked basis as to justify their purchase.

A strategy recommend by these commentators is to purchase shares just before the ex date and hold for 13 months therefore capturing 3 dividends. They then gross the 3 dividends up and and tell you what a wonderful return you will receive. All very true.

However this is not new trading opportunity, this type of trade has been around for ages. When it gets spruked more often than not people are trying convince you to do a trade that for many reasons may have lost some of its early natural attractiveness.

For example, buying bank shares for yield at low historic price to book values, reflected in depressed share prices.

The idea of ignoring your Capital Investment and focussing on yield alone seems pretty dumb. I think we need to look at the full relative picture to decide the opportunity cost of investing for yield.

Lets look at ANZ for example.

cum 91c div, shares closed at $33.70 yielding of 2.7% for the half year, as a comparison current Aussie 3yr bond 2.95% per annum.

same time last year cum 79c, shares closed at $25.40 yielding 3.1% for the half year, Aussie 3yr bond 2.5% per annum.

ie. 12 months ago you were getting a much better yield in absolute and relative terms. Today you must pay 33% higher share price (approximately $8.30 more) to receive and extra 12c half yearly dividend.

So please be aware.

 

Wayne Nicholls

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WES/WESN automatic reclassification if 20 day vwap above $43.11

I have written a number of blogs on Wesfarmers and the partially protected shares in recent weeks. And as the market rises the likelihood of automatic reclassification becomes more of a reality.

Automatic reclassification means that if you own a WESN share you will receive a WES share to replace it.

This event gets triggered when the WES VWAP over any consecutive period of 20 Business Days exceeds the Cap Price ($43.11) at any time prior to the Lapse Date.

The reclassification of WESN into WES on a 1:1 basis is a benefit to WES shareholders as it sees less dilution of the shareholder base on conversion. With about 150m WESN on issue and a potential maximum conversion of 1.256:1 automatic reclassification saves the extra issuance of 38m shares.

So if you own WESN and believe WES share price will continue to rise triggering automatic conversion, it might be an idea to sell WESN and buy WES.

WESN are still trading at about 34c premium to WES, and although liquidity in them is problematic it might be worthwhile starting to switch. With the capital return vote on 7th November nearing and a 50c capital return on the agenda, this may also prove to be supportive of the price of WES.

Otherwise the strategy of 15/10 still holds. Although more expensive to trade it now.

 

Wayne Nicholls

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The Aussie VIX can be traded on the Futures Market.

In 2010 the ASX introduced the ASX 200 VIX Index (XVI…IRESS) The Level of the XVI got published at the end of each day. From February of 2013 the ASX went live with “real time” XVI.

The details of the ASX 200 XVI look very similar to that of the CBOE VIX, as described in a recent blog.

 “The volatility index is based on the implied volatility of put and call options over the Australian equity benchmark index, the S&P/ASX 200. Two option maturities are used to calculate the index, with the nearest month at least a week away from expiry. The implied volatility of the options closest to maturity is interpolated with that of the options farthest from maturity, to arrive at a constant indication of expected volatility in the S&P/ASX 200 over the next 30 days.”

Interpreting the ASX 200 VIX

Reading the XVI is straightforward: the higher the index, the higher the forecast level of market volatility. Or market fear. As a result the level of the index is a forecast of investor sentiment and market expectation.

As the XVI is a measure of sentiment, it often trades inversely to the level of the ASX 200 Index. When the XVI is high as fear is high the ASX 200 often is falling. Similarly a low XVI may indicate calmness in the market. As a consequence of this characteristic some investors focus on how High or Low the XVI is trading as an indicator to get into or out of the market, based on mean reversion.

 On Monday 21st the first Australian VIX Futures contract commenced trading. Effectively giving investor a product to trade the ASX 200 VIX Index.

Product Development Manager, Brian Goodman says that the Futures have 2 specialist market makers and have already seen a number of trades.

Vendor Data for ASX 200 VIX

Bloomberg AS51VIX , IRESS XVI, Reuters .AXVI

S&P/ASX 200 VIX INDEX (^AXVI)

–ASX

11.54 0.39(3.23%)

S&P/ASX 200 VIX INDEX (ASX)

Wayne Nicholls

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Federal Court orders a Scheme Meeting for demerger of Recall by Brambles

A summary of WESN, and a couple trading ideas.

Wesfarmers Partially Protected shares (PPS) are a class of Wesfarmers Ordinary Shares issued to former shareholders of Coles Group Limited under the Scheme of Arrangement approved by Coles Group Limited shareholders on 7 November 2007.

They had a 4 year life, however at the discretion of the Directors could be rolled forward for up to an additional 4 years. The company has rolled them over the past 2 years.

The ability to Roll forward occurs when the ASX 200 All Industrial Index (XJN) averages below 6500 for the 2 months leading up to 7th November each year. This roll forward effectively ceases on 7th November 2015.

For all intensive purposes WESN are WES ordinary, with an added kicker, that on conversion WESN holders could receive additional WES ordinary shares depending on the conversion calculation price. In fact up to maximum 25.6% more shares should the recently announced 50c Capital Return get approved at the AGM on 7th November 2013.

If the two month VWAP for Wesfarmers Ordinary Shares is greater than $34.32 but less than $43.11 at the date of the Lapse Notice, holders of Wesfarmers PPS will receive a bonus issue of Wesfarmers Ordinary Shares (up to 0.256 Wesfarmers Ordinary Shares per Wesfarmers PPS) such that the total value of Wesfarmers Ordinary Shares received will be $43.11. If the two month VWAP for Wesfarmers Ordinary Shares is greater than $43.11, holders of Wesfarmers PPS will not receive any bonus issue.

The Calculation is ($43.11/2 month VWAP) – 1

So if the floor price = 2 month VWAP   $43.11/$34.32=1.256 or 1.256 WES for every 1 WESN

At todays close $41.76    $43.11/$41.76 =1.032 WES for every WESN.

WESN today closed at a 40c premium to WES.

Apart from the Final Lapse Date there is an automatic conversion which may occur.

Should WES 20 day VWAP average greater than $43.11, then automatic conversion occurs and each WESN get converted into 1 WES share. So if you owned WESN at todays price  you would effectively lose your 40c premium verse owning the WES Ordinaries.

If on the other hand you take the view that WES may struggle up at these levels, and your correct, WESN shares are going to out perform the WES over the next 2 years.

If this premium wasn’t 40c say it was 5c or parity, you would be silly not to switch. WESN at one stage in its life traded at a discount to WES. Which is unbelievable. However because the WESN expiry was so far away at the time investors didn’t understand WESN and let the opportunity slip.

If they had known that WESN were convertible to WES every month with 10 days notice, they should of stampeded into the WESN. Anyway thats history.

What about selling WES to buy WESN and use the 50c Capital Return to fund the spread…. just a thought. Maybe buy WESN and sell a long dates WES $43.11 call. Creates a nice buy right return, with the extra WES shares in the bag should the price fall….another thought!

Wayne

Related articles

• Westfarmers Return of Capital and Share Consolidation (derivativehouse.com)

Understanding Call Options p4

In this blog we look at Time to Expiry as a determinant of Call Option Premium.

Prior to expiry, any Premium in excess of Intrinsic Value is called Time Value. Or basically the amount the investor is willing to pay for an Option above its Intrinsic Value.

At Expiry a Call Option is either has value or has no value. This can be expressed as the Call Option being “in the money” ITM or “out of the money” OTM. However while there is time to expiry the end outcome for the Option is less known and Time Value is the value that depicts the level of uncertainty.

If the Call Option is OTM, it means the underlying asset has a market value lower than the Strike Price of the Call Option. Exercising the Call Option to buy the asset would make no sense as the asset can be purchased more cheaply directly. As seen in the wine example in the Understanding Call Options p3.

When valuing the Time Value of the Option we must consider the Volatility of the Underlying Asset, Time Value of Money and Dividends.

Volatility is a measure of the uncertainty, or variability of price of an Options underlying asset. Higher volatility means expected greater price fluctuations (up or down ) in the underlying price levels.

For ITM and “at the money” (ATM) Call Options the Time Value of Money is also a determinant of Call Option Premium.

This means you must consider the return you are receiving by owning the Call Option and excercise Funds verse holding the underlying asset out right.

Example:

An asset is now $100 I can buy the Asset out right or can buy a 6 month Call Option to buy that asset for $60.

From previous blogs we know this Options Intrinsic Value is $40. (Asset Value – Strike Price).

However there should be a greater value in the Premium than just The Intrinsic Value, because you have exposure to the Asset and don't have to pay the Strike Price for 6 months. So you are saving a $60 spend for 6 months. Option Premiums should include the value of this cost savings.

If we say interest rates are at 5%, the value of not spending the $60 for 6 months, but rather earning interest on it instead generates a value of $15. ($60 times 5% per annum divided by 2.)

So the Premium of an ITM Call Option with the above scenario would be $55.

Another Consideration when looking at Time Value of a Call Option is to discount its Premium for any event that may lower the value of the underlying asset over the life of the Option.

Typically this occurs when the underlying asset trades ex dividend during the life of the option.

Call Option owners are not entitled to dividends, so if the underlying asset trades ex dividend the value of that asset reduces. As such Premium should be less for Call Options where there is a dividend expected during the life of the Option. The extent of the discount will depend on the Strike Price, ITM Calls having a greater discount than the OTM Calls. As the reduced value of the underlying asset more directly relates to its intrinsic value.

On occasions holders of American style Call Options might decide to Exercise the Option before Expiry to capture the value of the dividend.

In summary, Time to Expiry as a determinant to Call Option Premium has two important aspects. Volatility and Time Value of Money. As expiry nears the impact of both these influences diminish, this is known as option Time Decay. Time Decay occurs because the chance of the Call Option being ITM or OTM becomes more certain, and with increased certainty we see less value placed on time in the Options Premium.

Over the 4 blogs Understanding Call Options we have discussed Defined a Call Option and broken it down into the constituent parts so as to better understand the concepts behind valuing the option and making a decision to exercise or not.

We have discussed Underlying Asset Value, Strike Price, Expiry Date, Premium, Volatility, Time Value of Money, In The Money, Out of The Money, Intrinsic Value, Dividends, American and European Styles and Time Decay.

 

In future blogs we will investigate practical uses and strategies of buying and selling Call Options within the context of the Australian Option Market.

 

Wayne

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