K. Le Du
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 (
) announced a merger agreement with FirstMerit (
). 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
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
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 (
), National City was acquired by PNC Financial (
) and Wells Fargo (
) 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
the cumulative dividend characteristic separated
winners and losers more definitively than any other
during those very extreme conditions.
Citizens Republic Bancorp Trust Preferred Stock
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,
Since then, the management team at CRBC has worked diligently to
recover. On July 28, 2011 the bank announced that it had returned
Cumulative Dividend Characteristic Rescues Shareholders
But the big news for CTZ-A shareholders came just a couple of
weeks ago on September 13, 2012 when the bank
a merger agreement with Ohio-based First Merit.
While the merger will take several more months to complete,
Fitch released a
saying that Fitch "
...expects CRBC's outstanding trust preferred shares to become
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
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
Preferred stocks identified within this article are for
illustration purposes only, and are not to be taken as
Network-Neutral Data Centers Lead Gains