SHARE PURCHASE PLANS (SPPs)
Are Share Purchase Plans (SPPs) a good idea?
Capital raisings often give small shareholders, no matter how small, the chance to subscribe to Share Purchase Plans (SPPs). The price is set, but you often don’t have to decide for a few weeks. You may have hardly had any shares in the company to begin with. The stock might continue to trade higher up until the last couple of days of the SPP closing date. It is some handy “optionality” you have. If the shares are trading quite a bit higher than the offer price, it might be a low risk trade. Your new SPP shares might show up in your account a week or two later and could be a good chance you can sell and book a nice profit. Of course the shares could slump in that fortnight or so when you hold, but equally they could even rise further.
I had some good experience in the GFC with these SPPs when the maximum amount you can apply for was $15,000. Now it is $30,000.
Those with good memories of the GFC would remember that many companies in Australia had to raise capital. Despite a lot of small shareholders in forums like Hotcopper who like to complain that the “big boys” (institutions) get all the favourable treatment, that is not always the case.
With the economic headwinds the economy faced after the virus spread, my feeling was our companies would have to raise capital in a similar manner.
I have bought many small parcels of shares in April 2020 to see if I might get lucky with this. As we go through the next year or two I wanted to update here on the day I potentially subscribe to any SPP.
I was curious to track what sort of returns this strategy in isolaton would produce.
The way I have done this personally is to make sure I only spend well less than say one day’s work. Maybe a couple of hours identifying and purchasing 30 stocks. I generally bought about $600 or so in each parcel, sometimes a bit less. My brokerage wasn’t super cheap or anything, and not like I picked the market lows. They were mostly acquired on April 6th, with some in the week or two following. I could have bought less in each stock but just balances making the brokerage quite small as a percentage.
These days I am hooked up to automated reporting for tax etc so I don’t find this any burden. Decisions on whether to take up the SPP offers also should not consume much time. As I said, it can’t be more than a day’s work all up that’s for sure. I could have bought more than 30 stocks, I know investors who have. Perhaps as you push up towards 100 though you might find yourself with companies not as likely to raise capital, or some that might perform poorly.
I will list the stocks here now. Remember my analysis here was almost zero as I didn’t want this to be time consuming. I plucked out plenty of banks and REITs, as that was in the back of my mind from the last GFC. Then sourced the rest quickly from a couple of articles on Livewire markets and other blogs about companies likely to raise capital. That was it.
Here are the stock codes.
AFI, AMP, ANZ, APT, ARG, BEN, BLD, BOQ, CBA, CPU, DOW, IDX, JHX, MGR, MMS, MQG, NAB, SCG, SEK, SGP, SGR, STO, SUN, SYD, TAH, TCL, VCX, VOC, WBC, WPL.
The total cost was $17,799.30.
I am then going to assume an investor has $30k cash on top of this to use to take up a SPP. I will assume this part earns zero. That is probably being too harsh on evaluating the experiment. To offset that I am going to arguably be lenient in another way. I will assume an investor could take up more than one SPP if they happened at the same time.
In reality, I suspect many investors might be able to tap some funds for example from an offset account or wherever it may be. (remembering the funds are only needed for a few weeks for each SPP for this strategy). In all likelihood though, there is a good chance that two SPPs don’t happen so close together in terms of dates.
So the portfolio total to track has a starting value of $47,799.30. That means cash is at 63%, so if markets climb normally a portfolio like that should not outperform! But will be interesting to track the power that this potential SPP optionality might have.
For a bearish investor that is sitting on circa $50k earning next to nothing it should be something to ponder. If they are thinking they want to sit on a lump of cash like this and use it for bargains in a year or so time, I am not sure it stacks up compared with this SPP approach. If we get a further market crash from here for example the $18k of stocks could lose $5k or so? Even in that ugly scenario I suspect we can book more than $5k of profits at some point anyway on SPPs at some stage in the next year.
Therefore I consider the funds in this SPP strategy example as not much riskier than cash anyway, but time will tell.
I shall update here next with any decisions on SPPs that come about.
Update May 20th
NAB SPP 2020
It is a couple of days away from the NAB SPP closing date and I have subscribed for $30k here. The shares are more than 9% “in the money” from the SPP price. I have my doubts I will get allocated the full amount but see it is an obvious decision to apply.
I remember that NAB had one in 2009 that was over 20% in the money and I think investors only got about $4k of a possible maximum $15k at the time.
I’ll try and be positive though. ANZ also had one that year that was nearly showing similar gains. They decided to give full allocations to all SPP participants despite it being way oversubscribed. Let’s see how we go. Who knows whether the NAB price will be able to hold up anyway. I think June 3rd is when these SPP shares are able to trade.
Update June 3rd
Unsurprisingly, the NAB allocation was very small, but nonetheless I booked a $680 profit. In the meantime, another opportunity has popped up with VCX announcing a SPP. I shall make an update here early July on whether I apply or not.
Update July 3rd re VCX
VCX ASX SPP 2020
VCX decision day is today and the stock is settling about 1.52 v a SPP price of 1.48. This looks marginal but I have now applied so I will outline the reasons. Because it looks a bit marginal I stand a good chance of a better allocation. The “in the money” amount might be a tiny bit larger than at first glance. It is the lower of 1.48, or the 5 day vwap with a 2% discount, the latter could come out nearer 1.46 instead of 1.48. So we might be talking about a 4-5% buffer in my advantage upon applying. If I look at the trading in June, it is really only the last week of June that VCX has traded below 1.48, probably the type of stock that stands out for tax loss selling. Apart from that June normally saw it more like 1.55-1.70.
Remember this is just a punt on where it will be less than a fortnight from now when it trades again, so my opinion on the company doesn’t count for a lot in that context. It is just about having the odds in my favor for a trading gain.
Update July 14th re VCX / APT
Well VCX didn’t work well! I thought the large volumes it digested well above the placement price for more than 3 weeks in June might be a good guide it can hold up. Although my “in the money buffer” was more than 4% as I made payment, the stock in about 8 trading sessions later dropped 13%. Selling at the open today saw a loss of $2,614 on a 30k allocation.
Meanwhile APT I think has a SPP going that I could participate in. Think this has a max of $20k and seemed small from memory relative to the market cap. If VCX can dust 13% in 8 days, APT could do plenty more, although I acknowledge the way it is going it could equally surge by more. The wide potential dispersion of results though would make me want more of a buffer than I had with this VCX trade. I shall update here of my decision a day or two prior to closing date.
Update July 29 APT / DOW
APT ASX SPP 2020
As I write APT is a smidgin above the SPP level so I am not bothering with it, especially given its huge volatility most of the time. There is perhaps a bit of irony about the basket of stocks I chose. Many were expected in late March to be terrible choices and hence needing to raise capital to repair balance sheets. My basket of stocks here I think is up a lot putting my own stock picking to shame in recent times! My little APT parcel of $500 is worth about $1,500 I think!
DOW was on my list and is raising capital but not conducting a SPP.
SPP STRATEGY UPDATE MARCH 7TH, 2021 (OR LACK OF AN UPDATE DUE TO LACK OF ACTION?!)
I will make this the last update in this section as it looks like the landscape has changed quite a bit, leading to me hardly taking any advantage of any SPPs with this strategy.
Since I have last made an update here, there have been more of my targeted companies raise capital. Quite frustrating really, I get many pro rata rights entitlement deals coming to my inbox for tiny amounts. Overall the list of stocks I so very quickly assembled was a reasonable bunch in terms of plenty of them needing to raise equity.
What has happened though is that the trend now seems to be to neglect the SPP route. To their credit I would say, a lot of the large companies are taking a fairer approach to capital raisings of late.
Initially I thought that the SPP amount going from $15k to $30k max provided better bang for your buck with this strategy. However maybe this is the reason companies have been uncomfortable using SPPs so much of late? Is it fair that someone like myself could potentially make a nice quick return when I hardly owned any shares to begin with?
Having said that as I write this type of approach is not such a failure. Ironically perhaps, the targeted companies I mentioned have been excellent performers!
For example, I mentioned a purchase cost of $17,799.30, and having $30k in cash availability which earns pretty much nothing. That as a portfolio combination is very under invested and should underperform by a large margin in a bull market like we have had right?
Let’s see how much that equity basket with a cost of $17,799.30 is worth now (assume we took the dividends in cash).The stocks and the dividends paid now total $29,574.4. A long only manager on the ASX would be happy with that bunch as they returned about 66% from around April 10th when I was implementing this strategy. I think the ASX200 accumulation index would be up around 28% in that time.
However then there is the damage done from my poor choice in deciding whether to participate in the very infrequent SPPs I was offered!
For example I participated in VCX and the market headed lower straight away, and this costed me $2,614. This was mitigated I guess by a $680 profit on NAB. Net the two out here was a drag to the tune of $1,934.
APT I declined to participate in a SPP thinking the margin it was “in the money” was too skinny. For most of the time we know APT has been going vertical in hindsight so this was an opportunity lost.
To see where this strategy sits today we can take the portfolio worth of $29,574.4 less the drag of SPP trades of $1,934, which gives us $27,640.40.
Add back our cash reserves of $30k, I have assumed this earnt nothing, we would be left with $57,640.40.
Remember in the original post I outlined how the capital required for the strategy was assumed as $47,799.30.
The overall return in about 11 months is therefore about 20.6%. After all the failings of some of my SPP judgements and the drag on returns from being underinvested, funnily enough this activity is showing returns of circa 22% annualized.
I should point out though if you simply put that $47,799.30 into something like an index ASX ETF like VAS, you would have done better and returned about 30% on an annualized basis. Index investors may rightly point out I wasted a lot of time and underperformed here so I understand that!
I will keep wondering how this all would have worked out if markets continued in a downtrend? It is all hypotethical. I think my basket of 30 stocks might have done worse than the market as many faced balance sheet pressures. Yet the $30k cash component would outperform in a declining market. I also suspect that in a market under pressure perhaps I could have seen a few more SPPs as these companies might have been in more need for capital from alterative sources. That possibly could have resulted in my chalking up a gain or two in another SPP.
Things may have looked a lot better for me if I wasn’t so stupid / unlucky? with SPPs on VCX / APT. I was reasonably close to passing on VCX, and reasonably close to participating in APT. But then again as the saying goes if your aunty had balls she would be your uncle.
Overall I think at the time this type of strategy was worth pursuing on a risk / reward basis and could have delivered good results in a rising or falling market.
However the mentality seems to have changed with how the blue chip companies seek to raise capital, preferring to avoid SPPs of late.
ASX LICs I have noticed recently are still inclined to do some SPPs. I did benefit recently a tiny bit going into GVF ASX for a short time for example. CAM, FPC & WAA are a few others that spring to mind that are going through the process now.
I still don’t mind keeping quite a lot of small holdings for this SPP optionality aspect in general. Automation on a lot of the admin tasks for me has meant I don’t see it as much of a hassle.
However seeing that a lot of companies are raising capital without SPPs of late, I don’t think I will look to add many more small holdings now for this type of strategy. I have enough already!
As I said earlier, since SPP opportunities seem to be drying up I will make this update the last under this blog category here.
Steve Green Research 