The same preferred stock characteristic that played such a key role in saving preferred stock shareholders during the Global Credit Crisis worked its magic once again a couple of weeks ago. On September 13, 2012, Citizens Republic Bancorp (CRBC) announced a merger agreement with FirstMerit (FMER). This deal was not only important for the principals, their shareholders, and customers, but it also serves as a real world reminder to preferred stock investors of how important the cumulative dividend characteristic can be.
The April 10, 2012 Seeking Alpha article titled "Identifying The Lowest Risk Preferred Stocks" uses the Global Credit Crisis (June 2007 through March 2009) as a study period to examine the relationship between the troubled banks that failed during that period and those that survived.
Specifically, the analysis evaluates the characteristics of the 70 preferred stocks issued by these twelve struggling banks during extreme conditions in order to determine if there were signals that would have tipped off investors to the higher risk preferred stocks.
Eight of these twelve Big Banks failed while four survived through acquisition. The eight that failed had 57 preferred stocks trading at the time; the four that survived had 13 preferreds trading.
Interestingly, the 13 preferred stocks issued by the four Big Banks that survived all met the ten "high quality" preferred stock criteria that have been the subject of several of my prior articles (source: Preferred Stock Investing, Fourth Edition, chapter 7 "Identifying CDx3 Preferred Stocks").
Further, the 57 preferred stocks offered by the eight Big Banks that failed were those that were unable to meet the high quality criteria. The high quality criteria, first published in 2006, got it right in 70 out of 70 cases.
Countrywide and Merrill Lynch were acquired by Bank of America (BAC), National City was acquired by PNC Financial (PNC) and Wells Fargo (WFC) grabbed Wachovia. The preferred stocks issued by these acquired banks continued to pay their dividends uninterrupted.
The April article concludes:
Using the Global Credit Crisis (June 2007 through March 2009) as a study period allows us to see the relative importance of preferred stock characteristics and their contribution to investing risk. While all characteristics are important and should be considered by preferred stock investors, the cumulative dividend characteristic separated winners and losers more definitively than any other characteristic during those very extreme conditions.
Citizens Republic Bancorp Trust Preferred Stock (CTZ-A)
With one exception, there has never been a case where a preferred stock that was able to meet the ten "high quality" criteria missed a dividend payment (my data goes back to 1926). The exception is the trust preferred stock issued by Citizens Republic Bancorp on September 28, 2006. CTZ-A has a dividend (coupon) rate of 7.50% which computes to a quarterly dividend obligation of $0.4688 per share.
Citizens is headquartered in Flint, Michigan, home of the U.S. auto industry. While Citizens survived the Global Credit Crisis (2007-2009), the auto industry meltdown that followed was a staggering second blow. The bank deferred the dividend on CTZ-A, its only publicly traded preferred stock issue, on January 28, 2010.
Since then, the management team at CRBC has worked diligently to recover. On July 28, 2011 the bank announced that it had returned to profitability.
Cumulative Dividend Characteristic Rescues Shareholders Once Again
But the big news for CTZ-A shareholders came just a couple of weeks ago on September 13, 2012 when the bank announced a merger agreement with Ohio-based First Merit.
While the merger will take several more months to complete, Fitch released a statement saying that Fitch "...expects CRBC's outstanding trust preferred shares to become current..."
Procedurally, the merger deal has to come to fruition and at that time the merged company's board of directors will declare the (massive) dividend for CTZ-A. The New York Stock Exchange will set the ex-dividend date at about two days prior to the record date declared by the board. Those holding shares of CTZ-A on that ex-dividend date will receive the declared dividend.
In anticipation of the big payout, the market price of CTZ-A jumped on the announcement.
It is because CTZ-A has the cumulative dividend requirement that CTZ-A shareholders appear about to be made whole again. Just as it did more than any other single characteristic during the Global Credit Crisis, the cumulative dividend characteristic appears to have once again saved preferred stock investors. Congratulations to CTZ-A shareholders; it looks like your patience is going to pay off.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Preferred stocks identified within this article are for illustration purposes only, and are not to be taken as recommendations.