Preference shares in banks have been resolutely out of favour since the onset of the credit crunch. That's because retail investors suffered either the loss of dividends, or faced the controversial forced conversion of their dividend-paying prefs into non-dividend paying equity as banks sought to bolster their core capital. However, one notable exception to this trend, whether by luck or design, is NatWest 9 per cent non-cumulative preference shares. These have turned out to have some of the best legal protection on the market and investors should look again at this pref as an inflation-busting source of income.
- Ring-fenced security
- 'Must pay' coupon
- Inflation-busting yield
- No worries over redemption
- Low down the credit ladder
- Could be turned into a 'CoCo'
What's baffling is how for much of the past three years NatWest's parent, Royal Bank of Scotland, has managed to continue paying dividends on this preference share despite regulators ruling that banks had to stop payouts to preserve capital. For the answer you have to go back to the status of NatWest within RBS's corporate structure. In essence, the NatWest prefs depend on the profitability of the NatWest high-street bank operation, which enjoys a legal ring-fence from the rest of RBS's operations. So, despite RBS's problems, which were caused mainly by takeover of ABN-Amro, the NatWest division's durable profitability meant the preference share dividends had to be paid and regulators had no legal basis to stop them.