Cooperative profit shares

General
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Let’s start a thread about cooperative profit shares, which have been mentioned in passing in some threads on this forum. Among the companies accessible to the general public, the well-known Osuuspankki and the “red machine” Tradeka offer these to their owner-customers.

Osuuspankki’s target yield has been 3.25% in previous years. For this year, OP aims to pay an additional 1.2% yield in honor of the banking group’s 120th anniversary, bringing the total yield to 4.45%. Last week, OP announced that it is raising next year’s target yield to 4.5%. More broadly, OP explains its profit distribution policy: “we aim to pay a yield on Profit Shares at least 1-2 percentage points above the average interest rate of the Finnish government’s 10-year benchmark bond.”

At Tradeka, the previous target yield was 3.5%. This week, however, the cooperative announced it is raising the target yield to 4.75%. Unfortunately, Tradeka has not disclosed the principles of its profit distribution policy in the same way as OP. Well, perhaps it is silently aimed at outdoing OP.

More information about OP’s profit shares can be found on the bank’s website: Tuotto-osuus - sijoita omaan pankkiisi | OP

There is an excellent blog post about Tradeka’s profit shares at Downshiftaus - Elämän Leppoistaminen: Tradeka Tuotto-osuus - Kannattaisiko sijoittaa?. Here is the company’s own page on the subject: Tradekan tuotto-osuus | tradeka.fi

The absolute trump card of profit shares is their taxation: “Profit shares are taxed more lightly than most other investment products. The interest paid on a profit share is capital income, and a 7.5 percent withholding tax is applied up to 5,000 euros, and 25.5 percent for the portion exceeding that.” (Source: OP)

Profit shares are not suitable as very short-term investments, as when you redeem them, you only get your money back at the end of the following year. That is, if you redeem your profit shares today, the money will be returned to you at the turn of the year 2023–2024. If the redemption is delayed, for example, until the beginning of next January, the money will be returned to you at the turn of the year 2024–2025. Interest is paid on the profit shares until the day the money is returned.

The target yield is only a target, meaning there is a risk involved, just as with corporate dividend payments. In practice, however, the cooperatives have stuck to their targets, as deviating from them would inevitably lead to large-scale redemptions of profit shares and permanent reputational damage.

Subscribing to profit shares requires joining the cooperative as a member. For most Osuuspankki branches, the one-time membership fee is usually 100 euros, and for Tradeka, it is 33.64 euros. Membership fees are refunded when leaving the cooperative. The most significant benefit of Osuuspankki membership is cheaper banking services and the accumulation of OP bonuses. Tradeka membership, on the other hand, offers discounts on the cooperative’s services and, in my opinion, the most significant benefits are the twenty-euro restaurant gift cards annually and the free digital version of Kuluttaja magazine.

Personally, in the name of diversification, I have also invested somewhat in cooperative profit shares.

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Inderesin kahvihuone (Osa 10)
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Wouldn’t it be worth changing the thread title so that it also covers other widely available cooperatives? The most popular of these are certainly the various regional cooperatives of the S Group.

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I changed the title. I believe it hasn’t been possible to subscribe to yield shares (tuotto-osuus) in the S Group, but some have paid interest on cooperative capital?

If there are more providers of similar yield shares, I would be happy to read about them here.

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Cooperative membership shares seem to be a cross between equity and fixed-income investments. The uncertain expected return resembles an equity investment, but the capital protection resembles a fixed-income investment. Cooperatives also offer bonuses, i.e., discounts on the services they provide. The discounts are thus off competitive market prices, which can be considered quite attractive. The amount of bonuses depends on the number of owner-customers. The more owner-customers there are, the more the bonuses are “diluted” across a larger group. This is evident in the fact that Tradeka has much better benefits than the S Group.

In a leftist spirit, cooperatives are hesitant capitalists. From the operating profit operating surplus, a portion is distributed back to customers, and a smaller share goes to the holders of investment shares. Although you get your capital back when resigning, its purchasing power has suffered from inflation. It is therefore worth considering your own consumption habits if you are thinking about joining a cooperative, as that is where the primary benefit comes from.

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If we look at the benefit brought by the cooperative’s membership fee, in OP, that benefit is directly linked to the use of services. In the case of Tradeka, I don’t really use the cooperative’s services myself, but if for that 33-euro membership fee you get, for example, those 20-euro restaurant gift cards every year (which for me means a couple of free Burger King meals a year; and I don’t really visit burger restaurants more than that anyway) and a free subscription to Kuluttaja magazine, then it’s quite good value for money.

But that’s moving into a slightly different theme than investment shares (tuotto-osuudet). Cooperative membership benefits as such are also a very good topic.

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I didn’t notice that the original title was only about supplementary cooperative contributions. If we limit it only to those, then the S-Group probably doesn’t belong here—though there may be differences between local cooperatives.

Interest has indeed been paid on basic memberships in various S-cooperatives. Historically, the interest yields were even quite excellent (for some, even over 10% on capital), and they didn’t require purchases from the respective cooperative’s area. A few years ago, you didn’t even have to pay taxes on them. But now, remarkably few still pay interest. I’ve been wondering if I should terminate those extra memberships.

Regarding the original title, I believe there are quite a lot of cooperatives in Finland. I have one in my own family circle, and there are all sorts of road cooperatives, etc. Some of these likely also have supplementary cooperative contributions. However, most of these cannot be joined freely by anyone, meaning they aren’t generally available as investment opportunities.

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The original title was otherwise the same as now, except Tradeka and OP were mentioned in parentheses.

Yep. There are plenty of cooperatives in the country. But in my view, OP and Tradeka are the only such investment objects for the general public. The aforementioned Metsäliitto would obviously be a great option if one happened to own forest.

PS. The momentum of that S-train has indeed seemed to stall quite badly: Yleisön pyynnöstä: S-juna 2021 - Vieläkö irtoaa osuusmaksun korkoja?

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Good reflections on cooperative return shares. The vast majority of Finns do not want any stock market risk, because even a temporary -40% price drop simply doesn’t interest them. It causes too much stress, and they do not want to decrease their quality of life with such things. Since the reason for a market crash is often not understood (is it a temporary situation lasting “only” years or a permanent decline), stocks are sold after a price drop just to be safe, in order to get rid of a mentally uncomfortable situation.

For such people, these return shares can be recommended with some consideration; part of the money in bank accounts can be directed to return shares if one knows the funds won’t be needed in the coming years.

It is not entirely risk-free, but in OP’s case, based on today’s information, it is very, very difficult to see a near future where interest and capital could not be returned. Osuuspankki is, after all, the market leader in Finland and the business is very profitable. Even if many other banks were to fail, Osuuspankki is at the safe end of the risk scale. The reputational damage would be so massive that such publicity is obviously not wanted except in an end-of-the-world scenario.

Tradeka’s investment portfolio is substantial enough in size that paying the interest on return shares is unlikely to cause problems. The operational business doesn’t dazzle with its profit, but indeed, even with a poor return on the investment portfolio alone, the interest can easily be paid to the cooperative members who acquired return shares. I was surprised that there are only a few return shares outstanding. Most likely, the majority of Tradeka’s members are quite poor or have not looked into the matter, which is why the return share hasn’t gained great popularity.

In itself, it is logical that a consumer cooperative’s return share might not necessarily be of interest, but at Osuuspankki, if your money is already in a bank account, return shares are psychologically easier to buy when recommended by a familiar bank clerk.

Personally, I am fundamentally interested in return shares. However, money is limited, and I have put mine into listed stocks using a dividend strategy. There is no extra money left to put into return shares. In the coming years, I may consider it depending on changes in interest rates.

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Whatever the financial position of a cooperative, it must be remembered that return shares (tuotto-osuudet) are equity-based investments. As with stock investments, they also carry the risk of losing the invested capital. Personally, I cannot bring myself to be interested in an investment where the gross interest rate is in the same league as T-Bills. Furthermore, return shares are illiquid assets, requiring a long wait for funds upon redemption. Indeed, those who invested in Osuuspankki’s shares had to wait until 2021 for the payment of the 2019 interest after industry-specific risks materialized.

Another question is whose interests the cooperatives actually serve. Everyone can reflect on how motivated Tradeka—which has funded the publication of Marx’s works, among other things—is to look after the return levels of those who have invested in its return shares. On the other hand, Metsäliitto participated in a cartel that harmed its own wood-selling owners. Even after the cartel was exposed, the cooperative’s management was not replaced.

So far, I have found enough investment opportunities with higher return potential that I haven’t spent time interpreting the financial statements of Osuuspankki or Tradeka. There is no capital appreciation to be gained from return shares due to transfer restrictions. The possibility of a bonus issue (rahastokorotus) is likely excluded for return shares, even if such a decision were made for basic shares.

Anders Oldenburg has excellently evaluated the attractiveness of Osuuspankki’s return shares as an investment in his Phoebus blog: Vko 16/22: Pankit/osuuskunnat – Seligson

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That is what happened. In my view, the realized risk in that case was reasonably moderate, and since the payment deferral was due to ECB mandates, it didn’t directly erode my own confidence in Osuuspankki. It did, however, serve as a reminder of the specific characteristics of the banking sector.

Given the low interest expenses of the profit shares and the reputational damage of missing the return target, I wouldn’t be very concerned about motivation. More focus is drawn to the fact that Tradeka’s own business operations don’t look particularly glamorous. In other words, the cooperative’s profit comes, if it comes at all, mainly from the investment side.

In my opinion, the text is quite meritorious in terms of breaking down banking risk. It can be faulted for completely ignoring the essential reason for investing in profit shares, namely the lower taxation of returns up to 5,000 euros of annual income. Additionally, the mentioned return range of 2.75% – 3.75% is no longer accurate at this moment; OP’s return target for next year has been raised to 4.5%. One could assume that there is still upward pressure if Euribor rates stay at this level or higher.

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The post was written from a fund’s perspective, making it natural to overlook taxation. At the current share price level and with the spring 2022 dividend, for example, Nordea’s net dividend is higher than the net interest target aimed for by OP. Aktia and Ålandsbanken reach the same level as OP. Of course, profit distribution is only one factor in making an investment decision.

The yield target has risen, but at the same time, the YTM of the fund used as a benchmark has risen to 8.6 percent. If there is still upward pressure, it will likely also be reflected in the yield level required from peers.

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From the fund’s perspective, the most essential point was already mentioned in the first sentence: “We cannot invest in cooperative banks, so I haven’t discussed them as an investment target.” But for those who can invest, taxation is, in my view, a completely essential factor in this matter.

Certainly so. I also have more money tied up in the stock market than in yield shares, so I see that form of investment mainly as one additional option for investing alongside, for example, stocks and real estate. And for investors like myself, who are at most mid-level, the current year has once again reminded us that diversification and risk management are indeed worthwhile.

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The fund can invest in profit shares (tuotto-osuus), as was apparent from the sentence following the one you quoted, but the interest, like most other investment returns, is tax-exempt income for it. This is why the topic was bypassed in the writing. For a natural person, the situation is different. Taxation is one factor when evaluating the profitability of an investment.

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Cooperative yield shares are only available for subscription by their members. At OP, “A person, corporation, or foundation using OP Financial Group’s services can become an owner-customer regardless of nationality.” At Tradeka, “Any private individual who has reached the age of 15 can join the cooperative as a member.”

And as Metsäliitto was mentioned earlier, you can join as “an owner-member of Metsäliitto Cooperative when you own at least three hectares of forest land in Finland.”

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Oldenburg wrote the following: “We cannot invest in cooperative banks, so I have not spoken about them as an investment target. We can invest in their yield shares, but they do not make us owners. They are the most high-risk subordinated loans (pääomalaina) that the bank simply does not want to call subordinated loans.” This matter likely does not have much significance for the thread’s topic.

In conclusion, I state that it is positive that investors have the opportunity to choose between investment targets implemented through different corporate forms. Memberships in producer cooperatives typically offer other benefits in addition to the interest on cooperative capital.

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In addition, a similar interest rate is available when conducting timber sales; you can choose to leave the timber sale proceeds to grow at that interest rate, either in full or in part, and pay taxes only upon withdrawal. Furthermore, an annual sum per cubic meter is paid for the following four years based on the realized volume. The current bonus rate is 0.15 EUR / m3 / year.

This year’s interest on basic shares will be higher than last year’s, and I wouldn’t be surprised if an annual interest rate of 7.0–8.0 percent is targeted, despite the large investments.

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A membership letter arrives once a year, and those gift cards are included in it.

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Once a year, Tradeka sends its members a membership letter by mail, providing information about membership in the cooperative and its benefits. The letter also includes benefit coupons that can be used as a means of payment at Restel restaurants. Benefit coupons cannot be exchanged for cash or gift cards. Please remember to present your membership card along with the coupons.

The 2023 membership letter will be mailed to homes in late summer.

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Metsäliitto raised cooperative interest rates as expected:

Interest of 7.0% (2021: 6.0%) will be paid on statutory base contributions based on the 2022 results. Interest of 6.5% will be paid on Metsä1 additional contributions, 4.0% (5.0) on A additional contributions, and 1.0% (1.0) on B additional contributions. Cooperative interest will be paid to members on 12 May 2023.

In addition, the Board proposes that a surplus refund of EUR 0.30 per cubic meter of industrial roundwood received from members during the previous four completed financial years be distributed.

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I also signed up for Tradeka membership because of that Kuluttaja magazine. The magazine would have cost the same as the cooperative membership. The difference is that the magazine costs money every year, while the cooperative capital (osuuspääoma) can even be recovered eventually.

I haven’t used the food vouchers, but I’ve come across a Tradeka pub a couple of times and used the owner benefit to buy drinks!

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