Retail Bonds - not as attractive as investors think

Primary Healthcare Properties 5.375% 2019: Today, I am taking a little spring diversion down the retail bond avenue. I have written on retail bonds previously and scratched my head about why private investors think they are so attractive. I fret that they really don’t fully appreciate that their capital is at risk. They are not savings covered by the Financial Services Compensation Scheme. There are unlikely to ever be enough vulnerable looking savers/investors in these instruments to make politicians pick up the financial pieces in times of crisis. Yes, bond-holders may be further up the pecking order than ordinary shareholders, but if things go wrong, they are unlikely to escape unscathed. PHP is an investor in primary healthcare premises, such as GP surgeries. These are let on long leases and the Government (of any mainstream persuasion) can be considered an implicit ultimate guarantor, given its commitment to the National Health Service. So the risks of financial calamity at an asset backed group like PHP might be considered lower than many other companies. But if that is the case, then the equity must also be a beneficiary of that asset backing and Government political capital.

For PHP the ordinary shares yield 4.9% at 398p, whilst trading at a 30% premium to Net Asset Value. The erosion of that premium is the likeliest capital risk for ordinary shareholders. Yet, as long as high-grade sovereign bonds trade at derisory yields, then property stocks look set to maintain such premia. The forecast dividend of 20p isn’t quite covered by expected earnings of around 18.6p, but in 2016 the expectation is for 21p of eps to cover a 20.5p dividend, up 2.5%. The bonds meanwhile have a mid-price of £105, which on a coupon of 5.375% is a running yield of 5.12%, barely more than the equity. Redemption is in July 2019, but with the bonds trading above par, the redemption yield is only 4.1%. If you are happy that PHP is safe enough to lend to, then I feel that you are likely to earn superior returns by investing in the equity as opposed to the retail bonds. (Neil Cumming^, 9^th April 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower