Question 1: At the moment coal businesses are out of favour with ESG (environmental, social and governance) concerns. Are oil and gas stocks such as Woodside (WPL) starting to get on this list as well and will this be a legitimate concern of investing in Woodside in the next 5 years or so?
Answer: I think ESG concerns are increasingly driving investor behaviour, and this is one of the reasons why coal companies and oil/LNG producers such as Woodside are languishing.
Despite the oil price increasing to around USD$70 per barrel, Woodside shares are still trading under $24.00. Admittedly, the LNG price hasn’t quite matched the oil price rise, and Woodside is undergoing a CEO transition, but that all said, its performance has been disappointing.
There is probably some value in Woodside with the brokers’ consensus target price of $27.53 about 16.5% higher than the current ASX price of $23.66. However, I am wary of the ESG issues, and while I like Woodside, I don’t see any attraction in being overweight the energy sector.
Question 2: As an ANZ shareholder, I have been offered “ANZ Capital notes 6”. Should I invest?
Answer: If you understand hybrid securities and want floating rate interest exposure, ANZ Capital Notes 6 are attractive. They will pay a fixed margin of 3% over the 90 day bank bill rate (which is currently around 0.05%). For the first 90 days, your effective interest return will be 3.05% pa. 70% of this is paid in cash (about 2.14% pa), with the balance in franking credits.
The main risks are that ANZ Bank runs into financial difficulties, or there is a crisis in Australian banking. In these cases, as capital notes, the notes may be exchanged into ordinary shares. If this was to occur, your investment would effectively be worth considerably less than the $100 you outlay up front.
The notes have a call date in March 2028 (in about 7 years), and a mandatory conversion date into ANZ shares on September 30 (about 9.3 years’ time).
The $1.2bn issue has been well supported in the broker markets. ANZ Shareholders can apply up until 30 June, with trading on the ASX under code ANZPI expected to commence on 9 July.
Question 3: What happens to stock option prices when the underlying stock price increases? Is there a reason why sometimes, when the stock price rises, the option price stays the same as before?
Answer: Generally, a call option increases in price when the underlying stock price increases, and falls in price when the underlying stock price falls. The reverse is true of a put option – it increases in price when the stock price falls, and decreases in price when the stock price increases.
An option price consists of two components – the intrinsic value and the time value. As the option gets closer and closer to expiry, the time value tends to zero such that at expiry, it is zero. The further away from the expiry date, the greater the time value.
The intrinsic value relates to how far the option strike price is from the underlying stock price. If for a call option the stock price is less than the strike price, the intrinsic value is zero. If the stock price is greater than the option strike price, then the intrinsic value is the difference. Take this example for a call option on CBA shares with a strike price of $100. If CBA is trading at $90, the intrinsic value is zero. If CBA is trading at $110, the intrinsic value is $10.
For options that are not yet in the money, you can get a movement in the stock price with no change to the intrinsic value, and effectively, no change to the value of the option. For example, same CBA call option at $100, if the CBA stock price rallies from $90 to $95, there is no change in intrinsic value of $0, time value remains the same, so the option price remains the same. While this is a touch over-simplified, the general principles apply.
Question 4: What do you think of the concept of the SPP Harvester, a product that allows automatic participation in share purchase plans? I initially steered away from it, but waiving the application fee piqued my interest again.
Answer: Be careful. Holding ‘1 share’ is below the ASX minimum parcel size rule of $500, so I am a little sceptical about how it can sustain this proposition. The other problem is that there is no guarantee that there will be a plethora of share purchase plans.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.