I analyzed this using RBS-N because it’s the issue I happen to be holding, but its based on yields so the conclusions should hold in general for any suspended RBS security.

First, I looked at the prices (30day SMA) and associated yields of RBS-N and PGF (the powershares financial preferred ETF), on August 19th, a day before S&P or Moodies broke the news about the possibility of dividends suspensions.

The yields at that point were:
PGF 8.66%
RBS-N 13.13%

For a ‘risk premium’ of about 450 basis points for RBS.

I then looked at the 2 year annualized return if the price returned to X. X was chosen so that the yield was either the historic risk premium compared to PGF, all the way down to being on par with the yield of PGF.

(example calculation. Historic PGF yield was 8.66%. RBS-N has annual coupons of $1.5875. To have the RBS-N yield be 8.66%, price must be $18.33. Over two years, this would be growth of $8.87 to $18.33 or 106% growth, or 43.75% annualized)

Chart of returns versus yields:

RBS-N
Yield
After
Restoration annualized return
----------------------------------
15.01% 9.2%
14.50% 11.1%
13.13% 16.8%
12.50% 19.7%
11.50% 24.8%
10.50% 30.6%
9.50% 37.3%
8.66% 43.8%

Conclusions:
If RBS-N yields returns to the historic spread, your annual return would be 17%
If RBS-N yields return to the exact PGF yield, annual returns would be 44%

Before you drool over 44% annualized returns, remember that this scenario would imply a complete elimination of any risk premium compared to the average financial preferred. Will not happen on an issue that just suspended for 2 years.



Finally, I looked at PGF’s current yield (~9%) and calculated the value of the dividends paid for every dollar invested. This comes out to be $0.19 after 2 years. With the 2 year treasury yield around 0.92% I didn’t even bother doing PV or FV calculations, and assumed dividends taken in cash, not reinvested. After two years, $1 of PGF should be $1.19 (assuming no capital appreciation) The nice thing about using a “risk premium over PGF” method of valuing these securities is that it allows you to make comparisons with out having to think about capital appreciation, because the yields and risk premiums are relative to price (being that the dividends amounts are fixed by prospectus) If PGF appreciates in value, then RBS preferreds would have to appreciate in value by some amount as well to keep the yield at the risk premium over the PGF yield.

As it turns out, the 2 year return on PGF (not including any capital appreciation) is 9.2%. To have an annualized return of 9.2%, RBS-N would need to return to a 15% yield, or 6.5% above the yield of PGF. This is 2% higher than the historic Aug 19th yield.