Value in hybridsjpg

As an active trader in the listed Hybrid market, I always monitor what is offering the best yields in the market. The idea with any interest rate security is that you should look at what yield a security is trading at rather than what price it is trading at. (see table below)

Because are so many variables with Hybrids, you need to be able to convert the price of the security into the yield of the security.

For example, look at CBAPE. The security was issued at a margin of 5.20% over the 90-day bank bill rate. The 90-day bank bill rate is constantly changing. The last interest rate was set on the 17th December 2018, when the 90-day bank bill rate was 2.02%. Because the security is paying a margin of 5.20% over the bank rate, the total interest rate for the next period is 7.22%.

The security’s face value is $100, so the payment due on March 15th, 2019 is:

  • $100 x 22%  x 90 days  / 365 days, which equals $1.7803.

Hybrid securities tend to pay 100% fully franked dividends, as it does with CBAPE.

So, the payment due on the 15th March 2019 is a cash payment of $1.2463 which is fully franked with $0.534 franking credits for a total payment of $1.7803, as previously calculated.

Some investors look at the dividend yield of 7.22% as being pretty good value but this is not the real yield (ie return on your investment).

The real yield would be 7.22% if the security was still priced at $100, but the price of the security is currently $106.95. Because you are paying $6.95 extra, you need to amortize this extra payment over the term to the likely maturity date, in this case 15th October 2021. This brings the yield back to 4.73%.

So each Hybrid security has different maturity dates, different margins over the bank bill rate, and different dates at which the periodic payment is set. By converting each security to a yield to maturity you can compare the relative value of each security in terms of what offers the better value.

Interestingly, the relative yields on these securities do change, so that if you buy something with a higher yield, that security price can rise giving you an opportunity to switch the share into something that offers a higher yield at the time.

On the 17th December 2018, I purchased a parcel of WBCPH at $95.38c, yielding about 6.15% at the time. The last close price on 18th January was $97.60, a 2.3% return for the month. As the Hybrid market has rallied across all securities, you can still compare the price rise of other securities of similar maturities => ANZPG 1.54%, CBAPH 0.87%, ANZPH 1.89% and CBAPG 1.54%.

Remember, before investing in Hybrid securities, you need to read and understand the disclosure documents to appreciate the additional risks involved.

For anyone interest, we are running a webcast on Hybrid securities on the 31st January at 7pm, where will cover the above and other risks of investing in Hybrids. Please register here