After examining the prospectus for the issue of Royal Bank of Canada Non-Cumulative First Preferred Shares Series and comparison with existing issues available in the marketplace, James Hymas, president of Hymas Investment Management Inc., stated today that he considers them overpriced at the new issue offering level of $25. As such, taxable investors in Ontario’s highest tax bracket may reasonably expect to do better with other preferred shares, he added.

“I estimate that the present value of the cash flows on offer in this issue are worth about $23.20 when discounted similarly to other high-quality issues trading on the TSX,” he said. “There is, as with any new issue in recent times, a liquidity premium is applicable — in this case, worth about $1.35 at the levels investors are now paying for the privilege of buying large quantities — but even with this boost the shares are overpriced. Retail investors in particular should not have to pay such exorbitant premiums and even institutional investors should be looking askance at the prospect of paying the equivalent of eighteen months of dividends simply to invest cash.

“It should not be thought that this evaluation of the Issue reflects poorly in any way upon Royal Bank, its future prospects or its credit-worthiness,” Hymas stressed. “Indeed, the ability to finance their operations so cheaply is a tribute to their acumen. But investors in preferred shares have alternatives that are projected to produce better returns.”