Royal Bank Of Scotland: Increased Talk Of Preferred Dividends

| About: The Royal (RBS)

Back on March 6, 2012, I wrote an article regarding Royal Bank of Scotland's (RBS) preference shares in which I arrived at the following conclusion:

Conclusion: The market is expecting RBS' currently suspended preferreds to begin paying the dividend again. As a result, it is possible to buy shares and end up owning high yield preferred shares with a built in gain.

I do have to stress that no announcement has been made at this time regarding the resumption of dividends on the suspended preference shares. The conclusion has been arrived at utilizing a "mosaic theory" approach looking at current pays, distributable profits, market pricing and peer actions.

I had arrived at this conclusion by observing the preference share prices, market sentiment and developments at Lloyds (LYG). As I expected, there would begin to be traction behind this assertion and we would begin to hear whispers from the company which help announce their intention regarding the preference shares.

Today, the Financial Times reports:

Royal Bank of Scotland is preparing to make its first dividend payment in four years as the state-backed bank attempts to overcome one of a number of obstacles in its path to reprivatisation.

The bank, which is 82 per cent owned by the UK government, is likely to make a £350m-£400m payment to holders of so-called preference shares next month, said people with knowledge of the matter. It is the first payout RBS is entitled to make after an EU ban on the payment of dividends expires at the end of April.

"The cost of not paying this dividend would be far greater than paying it," said one insider at the bank.

ShareCast adds:
LONDON (SHARECAST) - State-owned Royal Bank of Scotland is looking to resume dividend payments to holders of its preference shareholders to signal its progress on the road to financial stability.
"Paying a dividend is good market behaviour and is an important signal to debt holders and equity holders," an RBS source told the Daily Telegraph.
According to the newspaper, no decision has been made on the £350m to £400m payment which, in any case, would need to be approved by both the government and the Financial Services Authority.
There has been speculation recently that the government is trying to get the Abu Dhabi sovereign wealth fund interested in buying a chunk of shares in the bank, which had to be rescued by the UK tax payer at the onset of the credit crunch. According to the Telegraph, however, other institutional investors are interested in buying a stake in the company once the government is ready to cash in its chips.
"Institutions which have a long-term relationship with the bank don't want to be shut out of any deal to sell down a stake," one insider told the newspaper. "They want to be shown an offer, which could mean being part of a group of cornerstone investors alongside a foreign investor."
The Telegraph adds:
If RBS does not re-instate the dividend it will not be allowed to move forward with normal dividends to regular shareholders. It also won't be allowed to buy out the Government's dividend access share, whichgives the Government priority on dividends.
So the whispers have started.

The currently paying share trade at the following levels:

Prices courtesy Quotemedia

So as I did in my previous article, I will use current prices and to calculate an implied yield and determine what price is necessary to arrive at an 8% yield and a 9% yield in order to get a flavor for potential price appreciation.

First, the original chart:

Click to enlarge

Now the current scenario chart:

Click to enlarge

Prices courtesy Quotemedia

As we can see, there is still the potential for an average gain of 6% to 11% from current levels and the securities remain below par.

Payment dates for the securities are 3/31, 6/30, 9/30 and 12/31. If the company is able to begin paying in April, I would assume the next payment date would be the June 30th payment for the second quarter.

In case you were wondering, the following are the gains an investor would have had since I initially recommended the securities:

Not too shabby. The S&P over the time period returned 3.50%.

Again, I must caution potential investors (and current investors) that RBS has not formally announced the reinstatement of the dividends on the preference shares. At this juncture it continues to seem increasingly likely that they will.

Disclosure: I am long RBS.

Additional disclosure: Long RBS-L, RBS-H, NW-C, RBS-S