Using Instalment Warrants to take Advantage of Reporting and Dividend Seasons

Submitted by Marco on 4 March, 2006 - 18:41

Instalment warrants give you the right but not the obligation to purchase underlying shares; advantages - reporting & dividends

Dividend seaon comes straight after the reporting season and for the stocks listed on the Australian Stock Exchange (ASX) these events come around yearly around February and August. Using instalment warrants allows investors and traders to maximise their dividend income. Investors may want the exposure to the franking credits as well as the increased income, while traders may see the increased dividend and franking credits as a bonus to their regular trading strategy - perhaps looking to profit after an ex-dividend rebound if the shares are especially bullish.

Instalment warrants give you the right but not the obligation to purchase the underlying shares. They also give the owner of the warrants exposure to the dividend income as well as the franking credits. Warrant prices are usually controlled by market makers - namely the financial companies who issue out the warrants. Basically, there are instalment warrants that cover a variety of shares, mostly those in the ASX 100 and many of them are issued by many companies with varying levels of gearing, interest payments and cost. Sometimes an instalment warrant could cost $2 or $20 for the same $23 worth of underlying share.

You can buy into instalment warrants at issue direct from the issuer PDS forms (Product Disclosure Statement). This form of buying is called the "Primary market". If you missed out on the initial issue, don't fret - you can buy instalment warrants from the "secondary market". This means you would purchase them direct from the exchange through your regular broker. An added advantage of instalment warrants is that you are able to buy and sell your warrants actively through the secondary market and hence potentially make money from the rise and fall of the underlying share price. But if you want to do this you will have to mind the expiry date of the warrant. If you want to keep the underying share price you make the "final instalment" at the expiry of the warrant contract. The actual price at which you buy your "instalment warrant" is your "first instalment."

Say you want to invest $5,000 into Suncorp-Metway Limited (SUN) shares and the total ordinary dividend per SUN share over the term of the warrant (term is the length of time between initial issue and expiry of the warrant) is assumed to be $0.97 per share. You have the option to purchase plain vanilla shares or buy into instalment warrants.

A direct share investment of $5,000 will allow you to buy 233 SUN stocks at $21.44. So over the term of the warrant you will earn $226.01 in dividends on the SUN shares. On the other hand, using the $5,000 to purchase Instalment Warrants over the share can give you 481 instalment warrants at $10.39 per warrant. As a result, in effect you double the amount of shares - doubling the amount of dividends you receive, earning $466.57 with this instalment warrants strategy.