Santander Preferred Stock: Are North American Grandmothers Insane Or Just Ignorant?

There is – at least amongst North American grandmothers who are the natural buyers of American listed bank preferred securities – a love of yield.

Santander (the Spanish mega-bank) has preferred securities issued in America – they mostly replaced the preferred securities of Sovereign Bank – a Santander-owned US regional bank.

But they are equity securities of Santander – taking full equity risk for a high (but limited) yield.

Linked (here) is the Google Finance page for one such security. Par value is $25 and the last trade is $25.65 – a small premium to par.

What could possibly go wrong?

OK: plenty could go wrong – but we don’t need to analyse whether the Spanish mega-banks will succeed or fail – all we need to do is observe how bizarre the pricing is. Why would you own this preferred when you could own the common? The ADR is trading at $5.66 – and good earnings (2009 would you believe) were $2.24 per ADR. The common is two and a bit times normalized earnings. The no-failure earnings yield on the common is 40 per cent (and if it does not blow up you will get capital appreciation). The prefs are at 10 per cent yield.

There is a good chance that Santander never again earns “normalized earnings”. There is a crisis going on…

But go tell that to the preferred holders who are happy to take a very similar risk to the common for a 10 per cent yield and no chance of capital appreciation. They must envisage a world where Santander is saved by equity dilution that somehow leaves them intact. After all they are presuming (through their holdings) that the preferred is more attractive than the common.

And they believe that just as the Spanish Government injects 24 billion euro into Bankia.

Brave. Or is it ignorant?

Or do the holders expect the Spanish government to bail out banks at no cost to the preferred holders as per much of North America? That does not seem likely to me. Or even possible.


PS. I lost good money on Washington Mutual preferred stock. But I purchased them at 25 cents in the dollar. This one is going to trade there very soon in my estimation.

Disclosure: trading short on the preferred. Covered the common a few dollars up from here. But you guessed that.

PPS. In the interests of disclosure I should note that the borrow has become tight on this security (which  from my perspective is a pity).

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