BMW preferred shares – should investors prefer?

Finally, after a long lazy time I motivated myself to write something.

So today I want to show you something what might (!) be a result of inefficiency of markets, a topic that always fascinates me.

This might-be anomaly is about the German car-manufacturer BMW (“Bayerische Motoren Werke AG”), a group with almost 70 Billion in Revenue in 2011.

In general I’m not very bullish about the automotive industry, but this, I think, is worth one or two looks in depth.

Its 602 Mio. common stocks (Bloomberg: BMW) are being traded internationally in greats volumes, thereby being highly liquid. Additionally the commons are listed in several indexes, among them the German blue-chip index DAX or the EURO-STOXX.

Additionally there are preferred shares (BMW3) around, some 52,2 Mio, what makes when compared to the commons quite a tiny proportion. Accordingly Volume traded is much lower.

In the week of 05.03.2012-09.03.2012 there were 18,2 Mio. Pref. shares traded, with an average of 3,6 Mio/day. In my opinion that makes still quite a lot and should be suffice for a market to function and build an appropriate price. During the same time volume of commons was 261,5 Mio, with an average of 52,3M/day.

Due to the strong link between common shares and indices, Beta should be higher with the commons, as indeed it is. During the last year BMWs Beta (DAX) was 1,15 over the past 5 years 1,11. BMW3 has had a Beta of 0,99 and 1,05 accordingly. 

Same reason will probably explain the reduced volatility, last year commons had a volatility of 40,7%, whilst BMW3 had some 36,1%. Interestingly the spread seems to increase in the more recent time, for 5 years the spread was some 0,1%, during the last month it went up to 7%.

On Image 1 and 2 you can see screenshots with the data mentioned above.

Now let’s go on to the core this: The price.

On the following Diagram you will see:

a) The daily adjusted closing price of the common stocks (in blue, labeled Stamm, left Scale, in EUR)

b) The daily adjusted closing price of the preferred shares (in pink, labeled VZ, left Scale, in EUR)

c) The daily spread between those two stocks (in read, labeled spread, right Scale, in percentage)

From The raw data was taken from yahoo finance and processed by myself.

As you can see, right now the Spread between the two shares is quite high again, however far from historic height in late 2009. Median Spread is 28,23%, average is 32,88%, correlation 0,8697.

Now let’s see the dividend of each type of share:

As you can see, difference is quite small, only 0,02 EUR, what might have been something in 2000, when there was only 0,46 EUR/Share to be given, but with 2,30 (proposed) for 2011, this 2 cents don’t make much of a difference. Also consider that you will give up your voting rights for this 2 cents.

So naturally there must be a discount for preferred shares, however some 55% are quite a lot.

This is the estimated dividend yield with closing prices from the 16.03.2012: 3,2% common, 4,9% preferred.

So to come to an end, in my opinion the preferred shares are a much better pick right now since the discount a discount of 45% is too much. Ownership is stable, there are no roomers of major shareholder trying to gather up common stocks (=voting rights) and thereby trying to take control over. The last buyback program was in 2006 (3% of commons), and I doubt there it will be renewed.

All in all, I see chances here by going long on BMW3.