Dividends or interest? Debenture incentive rates outpace short-term earnings, study finds

Dividends or interest?  Debenture incentive rates outpace short-term earnings, study finds

For investors interested in passive income strategies, which is more interesting right now: buying shares of companies with a view to distributing dividends or investing in debt securities of companies that offer interest with periodic payments?

A survey by Bradesco BBI points out that in times of crisis and market stress, such as those we are currently experiencing, the profitability offered by incentive debentures – exempt from income tax – linked to the IPCA (Extended Consumer Price Index) issued by companies exceeds the dividend yield with shares of the same companies – in the short and medium term.

The mismatch between the return on credit assets and the dividend yield (rate of return with dividends) is temporary, but it represents an entry opportunity for the investor who likes fixed income securities.

“We understand that the difference between the cumulative profitability of the debentures and the dividend yield it is more important in times of crisis, given the decline in corporate profitability and the stress of the credit market”, underline the analysts Altair Pereira, André Sonnervig and Caio Lombardi in a report. “This difference tends to end with the reduction of inflation, the normalization of economic activity and the increase in corporate profitability”.

To reach this conclusion, the study compared incentive debenture compensation and yield with dividends paid out by seven electric power companies and one sanitation company, segments known for their resilient income and highly sought after by focused investors. on passive income. It should be remembered that, like income from incentive debentures, dividends are also exempt from income tax.

The survey selected companies that had issued at least one incentive debenture, remunerating the investor with a fixed interest rate plus the change in the IPCA and with maturities after December 2024. The implied three-year IPCA, of 7, was used in the account. of them%. At the other end, Bradesco BBI designed the dividend yield shares of these companies for the years 2022, 2023 and 2024.

Given inflation, rising real and nominal interest rate curves, falling spread (difference between the cost of raising funds and the compensation obtained by the investor) and the estimated dividends, the study points out that anyone who invested in incentive debentures of the companies considered and maintained the application until December 2024 would obtain a yield higher than that provided by the dividends distributed during the same period. The yield used for the debentures was based on the yield curve of the maturing bonds.

An incentive debenture from Taesa, for example, with an indicative rate of 6.3% per annum, would yield 41.2% until December 2024, already taking into account the implicit inflation of 7.2% for the period. Another paper from the same company, with an indicative rate of 5.2% per annum, would total a return of 37.1% in the same time window. On the other hand, the dividend yield of Taesa shares (TAEE11) accumulated over the period would be 22.8%, lower than the return on the debentures.

Among the companies considered in the survey, only in the case of CPFL energia (CPFE3) would the shareholder have a higher return than the bondholder, although the difference is minimal: 39.6% of dividend yield against 39% interest on the incentive debentures.

Check out the stock comparison of the eight companies below:

Is it more interesting to be a bearer of bonds than to be a shareholder?

For the experts consulted by the InfoMoney, rising interest rates, strong inflationary pressure in Brazil and around the world, in addition to the fiscal risk and uncertainty generated by this year’s elections, make the profitability of incentive debentures very attractive. However, the effect is short term and not expected to extend into the long term.

For some investors, it may be more attractive to seek higher returns from incentive debentures versus dividend strategy, points out Luciana Ikedo, investment advisor and partner at RV4 Investimentos.

“I imagine that this discrepancy should persist in the short term due to a very stressed scenario. I think that if the monetary tightening of the Copom (Monetary Policy Committee) comes to an end, the curve may close soon and won’t watch it anymore difference“, he says.

In order not to run the risk of opting for an asset that loses its profitability in the face of the possibility of reversing the path of interest and inflation, Luciana advises investors to always observe the real rate offered – that is i.e. how much the debenture earns above inflation.

It illustrates that if the security offers IPCA more than 6% per annum, what must be taken into account by the investor is exactly the return of 6%. “Current incentive debenture rates, given the income tax exemption, are very attractive. And they remain attractive if inflation recedes and interest rates fall,” he points out. Luciana, a return of IPCA plus 6% per annum should be the minimum sought by debenture holders.

Waldemar Junior, analyst and fixed income specialist at DV Invest, explains that the decline in corporate dividends in the short and medium term is linked to rising interest rates, which ultimately increase the cost of capital, put the pressure on corporate profits and, therefore, reducing earnings.

However, he points out that stress scenarios do not last forever and that when the Selic drops, inflation starts to decline and the fiscal balance improves, companies should start reporting better results again, with earnings and higher dividends. “The high interest rate move on debentures will not last long and should be used today,” he said.

In the long term, stocks can stand out

For the long term, focusing primarily on energy and sanitation companies, Sergio Biz, dividend analyst and partner at GuiaInvest, points out that investors will always have the opportunity to benefit from both dividends and more -values ​​- a situation that bondholders do not have.

According to Biz, it can happen that in certain short time windows and periods of high interest rates, debentures perform better than dividends. However, over the long term, the profits of good companies tend to increase and the total return on equities (dividends and capital gains) higher.

In addition, he mentions that companies in the electricity sector generally have their contracts and concessions adjusted for inflation. In this way, the high cost of capital, due to high interest rates, is relatively mitigated. “On the one hand, it increases the cost of capital. On the other hand, the revenue of these companies is also increasing,” says Biz.

For this reason, power companies that pay dividends are always attractive in high interest rate scenarios. And when the cycle turns and interest rates are lower, companies should continue with positive performance due to their defensiveness, the analyst said.

“Companies in the electricity and sanitation sector have growing dividends. The investor who buys bit by bit will get a return on cost (yield on the purchase price of the share) very attractive in the long term, greater than 20%”, he specifies.

But there are also the risks of investing in variable income, which can be far greater than those faced by bondholders. In an extreme situation, where the company goes bankrupt, the debenture holders have priority in receiving the money, while the shareholder, if there is anything to distribute, is the last to receive.

Luciana Ikedo of RV4 Investimentos also mentions the predictability of income. In debentures, the yield is already known by the investor at the time of purchase – although the IPCA is variable, the interest is fixed. In stocks, on the other hand, dividends are always estimated and payouts depend on company policy and timing.

Advantages and disadvantages of debentures

For those thinking about taking advantage of the debenture window of opportunity in the near term, there are things to watch out for, according to the experts.

Luciana Ikedo highlights the Evaluation (credit rating) of the issuer, which should preferably be AAA (the highest) or close to it. It mentions that the investor must also respect the duration (investment period or average period during which the investor will receive the invested capital and interest) and the liquidity of the securities, which is important if you need to sell them before maturity.

Luciana also explains that due to a recent regulatory change, from January 2023, the debentures will have their yield valued at the market, and no longer on the yield curve, as used in the Bradesco BBI study.

If the investor who bought a security with an IPCA yield plus 6% per year saw that yield in their account daily, next year they will see the price of the security counted against the value traded on the market every day. “In this case, there may be a premium or a fee discount. For those who intend to bring the assets to maturity, nothing changes, but for those who have not followed the evolution of the yield curve, it will be great news,” says Luciana. The change should add volatility to the debentures.

Thinking specifically of the electricity sector, Luciana points out that depending on the segment in which it operates – generation, transmission or distribution – debentures can also offer higher premiums, given the risk. A distribution company, more exposed to default, may possibly offer higher interest rates on debentures than a transport company.

Among the risks of investing in bonds, Waldemar Junior, of DV Invest, cites the lack of protection by the FGC (Credit Guarantee Fund), which would end up justifying higher returns compared to bank securities that have this ” insurance “.

To ensure that the resource is not lost, in the event that the company is unable to honor its commitments, it is essential to respect the guarantees offered, which may be physical assets available to the company for settle debts in times of difficulty. Some experts have reservations that high-risk companies usually don’t offer guarantees. Therefore, it is best to balance risk and return.

Waldemar Junior also highlights the pacts – contractual commitments to protect the interests of creditors – widely used by companies issuing bonds in the energy and sanitation sector. “It is a strategy that the company presents to the holder of the debenture, that it will pursue this objective without having to take financial risk and without having to settle its obligations in advance”, underlines the analyst.

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