Top picks 2012: Royal Bank of Scotland

P and Q preferred shares are a solid investment despite halt in dividend payments.

By TheStockAdvisors Jan 12, 2012 1:55PM
Image: Birds nest with golden eggs © Rob Casey/Brand X/Getty ImagesThis post is one in a series in which over 50 newsletter advisors share their Top Picks for 2012.

By Vivian Lewis, Global Investing

Royal Bank of Scotland (RBS) has tripped over its kilt. Nevertheless, as our top idea for 2012, we recommend the bank's preferred shares, specifically the non-cumulative preferred Q (RBS-Q) issues. We also like the preferred P series (RBS-P), which we already own.

RBS P & Q preferreds are not paying dividends until June 2012. However, I believe the dividends will resume then, which will be reflected in the price.

The shares were issued at $25 and targeted at U.S. retail investors. Interest payments were stopped for two years by the European Union's competition directorate because the British government controls 83% of RBS shares.

This allegedly creates a distortion in eurozone bank finance. However, the European Central Bank decision to allow banks to borrow for up to three years at 0.50% interest means that RBS is not getting a bargain because of its state ownership.

Moreover, RBS has been actively reducing its capital requirements by selling off assets acquired during its discredited former management's spending spree. It has already disposed of enough assets to reduce its need for government funding, and is selling its brokerage unit Hoare Govett, which it is not allowed to finance using branch deposits under new Basel rules.

Meanwhile, in the U.S., RBS is building up a business of exchange-traded notes (ETN) tracking stocks in the oil, gold, and pharmaceutical sectors.

In our view, it cannot fail to pay its other shareholders, even on the preferreds, and still maintain its ETN business, which is ultimately backed only by the bank's own credit and solvency.

We already own the RBS preferred shares series P, as noted above, and now recommend the preferred Q at under $12 for a double-digit payout level starting in six months. Mind your Ps and Qs!

See all 50+ stocks in our Top Picks 2012 Report.

Steven Halpern's TheStockAdvisors.com​​ offers a free daily review of the favorite stock ideas of the nation's top financial newsletter advisors.

Tags: RBS
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

126
126 rated 1
286
286 rated 2
474
474 rated 3
680
680 rated 4
626
626 rated 5
609
609 rated 6
620
620 rated 7
462
462 rated 8
304
304 rated 9
132
132 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
BIDUBAIDU Inc10
BXTHE BLACKSTONE GROUP L.P10
CELGCELGENE CORP10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.