In today’s Daily Alert, we have an update on one of the best-performing Top Picks for 2012 so far, Royal Bank of Scotland’s Q-series preferred (RBS-Q). Vivian Lewis, editor of Global Investing, gives us an update on it and on RBS’s other preferred shares (in case you want to buy more!) below.
“I continue to recommend (and buy) Royal Bank of Scotland preferred shares listed on the NYSE, although they have gone up a lot since I wrote my recommendation six months ago. ...
“There are nearly a dozen series of preferred shares from the British bank, which is now 78% controlled by the U.K. government. It was taken over at the height of the world financial crisis. We do not recommend the common stock, only the preferreds.
“Because of the government takeover, under European Union rules, RBS was prohibited from paying out dividends on some of its preferred shares, because this would hamper competitor banks, which essentially lacked the state control benefit. The ban, imposed in 2010, ran out in April and all the preferreds will pay a dividend [soon].
“Under current conditions in the E.U., the ban on dividends from banks aided by the state has become a nullity. All banks can borrow from the European central bank at generous terms. But in any event, payments are about to begin for the preferreds bearing the letters M to S, including the Q recommended here in January.
“The stocks to begin paying out have all gone up between 43% and 49% since I tipped them. ... There is still a bit of increase not yet showing for the above-M preferreds because you only see payouts after they have been made. Stock tables show zero dividends for the M, N, P, Q and S series because they refer to prior not future periods. So there is more increase yet to come. ...
“There are a few problems with these NYSE-listed preferred shares. First of all, every now and again a rumor begins that the Scots are bust (which they are) and that the government will dump the stocks (which is nonsense). The U.K. will not dump its shares until they have gone up some more, because Downing Street doesn’t want to present British taxpayers with a loss.
“There are potential Middle Eastern fatcats who want to buy part of the U.K. stake in RBS. But they want to invest alongside the U.K. government. The RBS portfolio of things like insurance subsidiaries and on-line banks and marginal foreign banks that can be sold to raise capital has been raided and will be raided some more. Bits of the business and Middle Eastern finance depend on the bank getting its mojo and reputation back in the U.S. I can think of no reason why the payments will not be made on time.
“There are several technical problems I should warn you about. The liquidity of these shares has fallen since the start of the year as institutional investors and mutual funds piled into the RBS preferreds. The spread between bid and asked prices has grown as a result.
“Then too the notation for these shares varies from brokerage to brokerage, even though they are on the Big Board. RBS is easy, but what comes after it depends on the broker. Some use a period followed by a capital or a lower-case P or PR (for preferred) and then a letter. Others use a dash or a colon between RBS and the series letter. If you have to call your on-line broker to find out the prices be sure to ask how to input the trade without help once you get the symbol, or you will pay even more than the spreading spread. If you are willing to use weekly figures you can see a list in Barron’s.
“I own the F, M, N, P and Q RBS series and the Nat West C. But if I were buying today, I would buy the RBS L-series preferred (RBS-L), the RBS series that has gone up the least among those paying currently. Among soon-to-pay preferreds I prefer the Q today, mainly because right now it’s cheaper than the others.”
- Vivian Lewis, Global Investing, June 7, 2012