Financial Adviser: 5 Dividend-Paying Preferred Stocks Every Saver Can Buy to Earn Up to 9.5% p.a.

Preferred stocks, which work like debt and equity at the same time, pay fixed dividends annually.
ILLUSTRATOR WARREN ESPEJO

Rising interest rates and inflation have caused dividend yields of preferred stocks in the Philippine Stock Exchange to rise, as share prices fall due to poor market sentiment.

The median dividend yields of listed preferred shares has been increasing to 6.10 percent to date from a low of 5.97 percent in December last year.

Preferred stocks, which work like debt and equity at the same time, pay fixed dividends annually, similar to a bond paying interest income to the holder.

When the market price of a preferred stock falls, the cost to invest in the stock becomes cheaper, thereby raising the effective dividend yield.

At this level, the median dividend yields offered by preferred stocks at 6.10 percent is lower than the seven-year Philippine bond yield at 6.67 percent, but slightly higher than the three-year bond yield at 5.68 percent.

Further rise in interest rates in the short-term may push share prices lower that can make investing in preferred shares attractive as dividend yields rise.   

Perhaps not many are aware that preferred stocks also enjoy a certain tax advantage over fixed income.

The interest income that you get from bonds, for example, is normally charged with a final tax of 20 percent while dividends from preferred stocks are taxed only 10 percent.

Moreover, because preferred stocks are traded, you can invest as low as P10,000 and make your buy-and-sell decisions easily on a real-time basis, whereas in bonds, you need to meet a minimum investment amount and need to go through brokers where execution may take longer than 24 hours.

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Before you buy preferred stocks, bear in mind that in times of financial distress, company issuers may delay payments of dividends. There is a risk that you may have to wait for your promised dividends indefinitely in case the financial situation worsens.

So, it is important that you make sure that the company is financially capable of paying its dividends on time. You can do this by reviewing its profitability and financial performance.

Always ask yourself: what is the probability that the company will fulfill its promise to pay dividends consistently? Can it generate enough cash flow to cover the projected dividends aside from the existing interest expenses?

There are only 30 active preferred stocks in the Philippine Stock Exchange. Let’s review and update the top five preferred stocks in the market that pay the highest yield today:

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1| Phoenix Petroleum (PSE: PNX4)

Price: P799.50

Dividend Yield: 9.46 percent

Phoenix Petroleum (PNX) is engaged in the trading of refined petroleum products on wholesale and retail basis. It also operates gas stations, oil depots, storage facilities and allied services and distributes lubricants and chemicals under its own brand.

PNX’s total revenues has been growing by an average of 32 percent per year, from P5.9 billion in 2009 to P97.8 billion in 2019. This growth in revenues has resulted in seven percent annual growth to P1.5 billion in 2019 from P751 million in 2009.

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At the height of the pandemic in 2020, total revenues declined by 20 percent to P78 billion, which caused its net income to plunge to P101.5 million.

Last year, PNX’s total revenues recovered by 69 percent to P132.3 billion, its highest in history, but resulted to net loss of P462.5 million due to higher interest expenses, which increased by 81 percent from P2.04 billion in 2020 to P3.69 billion.

This year, PNX’s total revenues for the first six months continued to reach new highs, increasing by 11.1 percent to P76.2 billion from P68.5 billion in the same period last year, but rising interest expenses sustained its trend and eat into its profits, resulting to a net loss of P62.1 million from P253 million income in 2021.

PNX has two types of preferred shares in the market: PNX3B and PNX4. PNX3B pays a fixed dividend of P8.108 in four quarters every year.  

Last July, shares of PNX3B were sold down by investors, causing its share price to lose by as much as 20 percent to a low of P80 per share, due to fears that the company may default on its debts.

But the stock has since recovered to P92.85 per share as PNX announced that it would pay its dividends for the third quarter this September.

At current share price of PNX3B, its dividend yield stands at 8.73 percent.

PNX4, on the other hand, pays a total of P75.68 per year. Like PNX3B, PNX4 shares were also sold down two months ago and its share price lost by as much as 38.5 percent, from P975 per share to a low of P600 per share in August.

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PNX4 shares have since recovered to P799.50 per share and at this price, its dividend yield stands at 9.46 percent, the highest in the sector.

Both PNX3B and PNX4 are both subject to step-up dividend rate this year.

PNX3B will be celebrating its seventh-year listing anniversary this December 15 and if PNX will not be able to redeem the shares, its dividend rate will increase by two percent to 10.1078 percent or P10.78.

PNX4, on the other hand, will be subject to redemption on the third anniversary of its listing date on November 7. Failure of PNX to redeem PNX4 shares will result to a step-up dividend rate.

The adjusted dividend rate of PNX4 will be whichever is higher between the prevailing dividend rate, which is 7.5673 percent, or the step-up benchmark rate, which is the average 7-year Republic of the Philippines Peso-denominated domestic government bonds plus 850 basis points or 8.5 percent.

Let’s say the average 7-year Philippine bond yield in November will be the same today at 6.67 percent. We can determine the step-up rate by adding 8.5 percent to get 15.17 percent.

Since the step-up rate of 15.17 percent is way higher than the prevailing rate of 7.5673 percent, the adjusted dividend rate will be the 15.17 percent after the anniversary assuming PNX will not redeem the shares.

Based on the issued number of shares of both preferred stocks, PNX will mostly likely redeem PNX3B this year as this will require only P375 million.

PNX has a total cash position of P7 billion as of June 2022 so we can assume that it can afford to redeem PNX3B, but not PNX4 shares, which has a redemption amount of at least P5 billion.

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Unless PNX resorts to more borrowings to redeem the shares, the company will probably keep PNX4 shares in the market for now, while it tries to resolves its increasing financial leverage.

Expect PNX4 shares to continue to be volatile as market speculates on the company’s financial position. The high dividend yield of the stock reflects its high level of risk.

2| Cirtek Holdings Philippines (PSE: TCB2D)

Price: P55.00

Dividend Yield: 7.046 percent

Cirtek Holdings Philippines (PSE: TECH) is primarily engaged in the manufacturing of value-added, highly integrated technology products and semiconductor packages.

TECH’s revenues, which are mainly contributed by its customers from Europe and United States, have grown by an average of 10 percent for the past 11 years, from $23 million in 2009 to $68.9 million in 2020.

The consistent growth in TECH’s revenues enabled its net income to grow by an average of 19 percent per year to $6.6 million in 2020 from $963,000 10 years ago.

Last year, as the global economy recovered from the pandemic, TECH’s total revenues slightly increased by 1.8 percent to $70.2 million, which resulted in a 23.3 percent increase in net income to $8.1 million.

This year, TECH’s total revenue growth for the first six months was almost flat at $46.1 million from $45.6 million in the same period last year, but net income went down by 21.5 percent to $6.2 million from $7.98 million due to higher operating expenses.

TECH has recently repaid some of its loans after raising funds from its preferred share offering. The company was able to lower its interest expenses this first half by 14 percent from $2.3 million to $2 million.

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TECH’s debt-to-equity ratio improved to 0.31 from 0.42 in December 2021 as a result of the debt repayment thereby strengthening its financial position.

TECH has two types of preferred shares which it listed only last year, TCB2C and TCB2D.

TCB2C, which has a mandatory redemption period of three years, pays P3.29 per share annually over four quarters. At the current share price of the stock, TCB2C has a dividend yield of 6.11 percent.

TCB2D, on the other hand, has a redemption period of five years. The stock pays P3.88 per share annually over four quarters. At the current price of the stock, TCB2D has an attractive dividend yield of 7.046 percent.

3| Petron Corporation (PSE: PRF3B)

Price: P1,050

Dividend Yield: 6.798 percent

Petron Corporation (PSE: PCOR) is the largest oil company in the Philippines, being the only operator of the country’s remaining refinery and a leading player in the Malaysian market.

PCOR has a combined refining capacity of 268,000 barrels per day, supplying around 40 percent of the country’s total fuel requirements through the operation of its 180,000 barrel-per-day oil refinery in Bataan.

PCOR’s total sales have consistently increased by an average of 11 percent per year from P176 billion in 2009 to P514 billion in 2019, but its net income has been volatile due to the steady rise of its interest expenses, which increased from P4.2 billion in 2009 to P13.5 billion in 2019.

During the 2020 pandemic, PCOR’s total sales fell by 44 percent to P286 billion, resulting in a net loss of P11.4 billion, but last year, with the opening of the economy, total sales recovered strongly, increasing by 53 percent to P438 billion.

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The rise in total sales, along with higher margins and lower interest expenses, resulted in a net income of P5.4 billion.

This year, the rise in global oil prices boosted PCOR’s total sales for the first six months, increasing by 128 percent to P398 billion from P174 billion in the same period last year.

The rise in PCOR’s total sales, fueled by the increase in gasoline prices, increased its total net income by 98 percent to P7.7 billion from P3.8 billion in 2021.

PCOR has a debt-to-equity ratio of 2.1 times, but its generating operating income that is three times its interest expenses.

PCOR has two types of preferred shares in the market, PRF3A and PRF3B, which it listed in 2019.

PRF3A has a mandatory redemption period of 5.5 years and pays total cash dividends of P68.71 per share every year. At the current price of PRF3A, the stock’s dividend yield stands at 6.607 percent.

PRF3B, on the other hand, has a mandatory redemption period of seven years and pays P71.38 per year. The stock currently has a dividend yield of 6.798 percent.

4| Century Properties Group (PSE: CPGP)

Price: P100.50

Dividend Yield: 6.684 percent

Century Properties Group, Inc., (PSEL CPG) is one of the leading real estate companies in the Philippines with a 35-year track record. The Company is primarily engaged in the development of mid- and high-rise condominiums and leasing of retail and office space.

CPG has completed a total of 34 projects that include 30 residential projects, such as Gramercy Residences, Knightsbridge Residences, Trump Tower, and Azure Urban Resort Residences.

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CPG’s total revenues have been growing by an average of 28 percent per year in the past 10 years prior to the pandemic, from P1.19 billion in 2009 to P14.3 billion in 2019.

The consistent rise in CPG’s total revenues resulted to an annual six percent growth in its net income from P692 million in 2009 to P1.28 billion in 2019.

During the 2020 pandemic, CPG’s net income declined by 38 percent to P795 million as total revenues fell by 24 percent to P10.8 billion.

Last year, CPG’s total revenues continued to fall, losing 13 percent to P9.44 billion. Net income, however, recovered by 19 percent to P950 million due to higher gross margins and lower interest expenses.

This year, CPG’s total revenues for the first six months recovered by 20 percent to P5.31 billion from P4.4 billion in the same period last year.

This enabled CPG’s net income to increase by 20 percent to P548 million from P457 million last year.

CPG has maintained a good financial position with current ratio of 2.0 times and debt-to-equity of 0.8 times as of June 2022.

CPG’s preferred stock, CPGP, which was listed in January 2020 has a mandatory redemption period of three years. CPG will redeem the shares on the sixth month after the third-year anniversary of its listing.

This means that if you buy CPGP shares before its ex-date on September 30, you will still be able to receive dividends for the third quarter and fourth quarter.

Because the mandatory redemption will happen on the sixth month after its January listing anniversary, this will mean that CPGP will pay two more dividend quarters next year.

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This will amount to a total of P6.72 per share, which gives a total dividend yield of 6.684 percent at current share price.

In the event that CPG is not able to redeem the shares next year, which is unlikely, the step-up rate will be the average seven-year bond yield plus 687.5 basis points or 6.875 percent.

5| A. Brown Company (PSE: BRNP)

Price: P105

Dividend Yield: 6.667 percent

BRN is primarily a property developer with a bulk of its business focused in Mindanao such as Cagayan de Oro City; Intao, Misamis Oriental; Valencia City, Bukidnon; and Butuan City, Agusan del Norte.

In recent years, BRN has diversified its business interest in power generation, water utility, and palm oil production, which contribute roughly 10 percent of its total revenues.

A bulk of BRN’s revenues, comprising about 90 percent of total, comes from its real estate business.

BRN’s total revenues have been growing by an average of 29 percent every year prior to the pandemic, from P484 million in 2016 to P1.03 billion in 2019.

This growth in revenues enabled BRN to increase its net income from a loss of P76 million in 2016 to P494 million in 2019.

But during the 2020 pandemic, BRN’s total revenues slowed down by 15.8 percent, causing its net income to fall by 40 percent to P294 million.

Last year, despite the gradual reopening of the economy, BRN’s revenues continued to fall, losing 17.8 percent to P710 million from P864 million in 2020.

Total net income, however, increased by 35 percent to P397 million from P294 million in 2020 due to higher gross profit margins and increased earnings from affiliates.

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This year, BRN’s total revenues for the first six months finally recovered, increasing by 97 percent to P571 million from P289 million in the same period last year.

The strong revenue recovery enabled BRN’s net income to increase by 69 percent to P381 million from P225 million last year. BRN’s first half net income this year already represents 96 percent of its full year net income in 2021.

BRN has a healthy current ratio of 3.04 times and debt-to-equity ratio of 0.43 as of June 2022. It also has a good interest coverage ratio of 7.88 times.

BRN’s preferred stock, BRNP, which was listed only last year, has a mandatory redemption period of five years. BRNP pays a total cash dividend of P7.00 per share ever year.

At the current share price of BRNP, the stock has an attractive dividend yield of 6.667 percent.

Henry Ong, RFP, is an entrepreneur, financial planning advocate and business advisor. Email Henry for business advice [email protected] or follow him on Twitter @henryong888 

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