You can’t eat share certificates

First Capital Realty has announced that interest payments to holders of some of its convertible unsecured subordinated debentures will be made in common shares instead of cash.

These debentures trade on the TSE and have been popular because of their high yields.

There is nothing wrong with the stock of the company, which held up well in the current market turbulence and is currently paying a quarterly dividend of $0.27. But I don’t like the decision.

The president and CEO, Dori J. Segal, says the move is being made to increase liquidity in the company’s stock and is consistent with the original prospectus. However, the recent bitter experience with Bell Canada International shows the potential danger to investors when a company substitutes equity for cash payments.

Some investors are holding this debenture in RRIFs because of the high yield it offers. However, equity payments are absolutely no substitute for regular cash flow in a registered plan. You can’t eat share certificates.

If you own any First Capital debentures, contact your financial advisor and find out if they are paying off in cash or shares. If the latter, discuss whether y should continue to hold or sell the bonds at this point.

Adapted from an article that originally appeared in the Internet Wealth Builder, a weekly e-mail investment newsletter that features some of Canada’s leading stock market experts.