2 European Investments on Sale

Because of the massive share dilution and major ownership by each country's government, many investors are hesitant to put money into the stocks of Royal Bank of Scotland Group (NYSE: RBS  ) and National Bank of Greece (NYSE: NBG  ) . But we're going to look at another way to invest in the recovery of these banks while being more insulated from share dilution and future recapitalizations.

RBS: discount and a yield
With government ownership of more than 80%, RBS is something of an unsolved problem for the British government. All of this has cast a cloud of uncertainty over the bank -- depressing the value of RBS-related securities. In addition, the common stock pays no dividend, so investors need share-price appreciation to see a return on their investment.

However, there is an alternative for those bullish on RBS but still wanting to collect a dividend. RBS preferred shares currently pay substantial yields north of 7% annually, as well as trading at a discount to liquidation value. One example is RBS Preferred N Shares (NYSE: RBS-N  ) with a yield north of 7.5% and a more-than 15% discount to liquidation. Fortunately for U.S. investors, RBS has many different preferred shares listed on the NYSE, giving you a wide choice in selecting the right investment.

RBS preferred shares will not only allow the holder to collect a high yield, but they also stand to benefit from a decision on how the government will address the RBS situation going forward. If RBS is moved back toward privatization, the appetite for RBS preferred shares may increase as government control is loosened and private investors have a better look at what the future of RBS will entail.

National Bank of Greece: half-price sale
Unlike RBS, which has numerous varieties of preferred shares listed on the NYSE, National Bank of Greece only has its Series A Preferred Shares (NYSE: NBG-A  ) . Also unlike RBS, the dividend on these shares is currently suspended as the Greek bank tries to preserve capital.

But buyers of National Bank of Greece preferred stock are compensated through a 50% discount to liquidation value. This discount is built in to reflect the state of Greece's economy, the bank's uncertain future, and the lack of a dividend.

However, when compared to common shares of National Bank of Greece, the preferred shares offer substantially less risk while still giving investors the opportunity to double their money and begin collecting a dividend if the bank is seen as more stable. Additionally, the preferred shares avoid much of the recapitalization risk by avoiding the share dilution aspect of raising capital by issuing new shares.

Although RBS shares offer investors a solid dividend until the bank can turn around, National Bank of Greece preferred shares require long-term patience in holding for a recovery in the Greek financial system. But one bright spot for National Bank of Greece preferred shares is that for the Greek bank to pay dividends to common shareholders, it must first reinstate the preferred stock dividend. If Greece can recover and investors begin to pressure for a dividend, preferred shareholders are first in line.

Preferred option
Most preferred stocks act much like bonds that have less upside potential but pay a consistent dividend. But in the cases of RBS and National Bank of Greece, preferred stock carries a major upside as well. Investors looking to invest in European banks while collecting a dividend or reducing recapitalization risk should take a look at the preferred shares of RBS and National Bank of Greece.

More banks with upside potential
Have you missed out on the massive gains in bank stocks over the past few years? There's good news: It's not too late. Bargains of a lifetime are still available, but you need to know where to look. The Motley Fool's new report "Finding the Next Bank Stock Home Run" will show you how and where to find these deals. It's completely free -- click here to get started.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2666405, ~/Articles/ArticleHandler.aspx, 7/29/2014 9:02:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement