Redeemable cumulative preferred stock

economic-dictionary

A redeemable cumulative preferred share is one that gives its holder preference in the payment of dividends with respect to ordinary shareholders.

In addition to the fact that in the event of non-payment of dividends, they accumulate, and together with this, they are amortizable by the entity that issues them.

As can be seen, a redeemable cumulative preferred stock stands out for its triple characterization. So, to better understand how it works, we are going to explain each of its three characteristics. Let's start with the term "preferred".

Preferred share

A preferred shareholder has preference in the payment of dividends of a company over the ordinary shareholder. In other words, the dividends corresponding to the preferred shareholder will be paid first, and later to the ordinary shareholder. But on the other hand, preferred shareholders do not normally have the right to vote at shareholders' meetings like ordinary shareholders.

Perhaps the most attractive thing for a preferred shareholder is that the shares pay predetermined dividends. While for ordinary the dividend is variable. But, the problem of a preferred shareholder comes when the company decides not to pay dividends. It is here where the following characteristic gains its weight in import: "cumulative".

Cumulative preferred stock

A cumulative preferred stock is one that in the event that the company does not pay dividends, the shareholder accumulates them. They are accumulated in such a way that before paying any dividend to the ordinary shareholders, the total balance of the preferred ones must be settled.

Redeemable action

It is one where the issuer of the share has the right to repurchase it, at a predetermined price, and within a specified period. When issuing an action type like this, a number of important conditions must be defined. These conditions are as follows:

  • Redemption price: It is the price at which the entity will buy back the shares from the shareholders.
  • Redemption date: A minimum period is usually established that the issuing entity must wait to redeem the shares. Normally, a period of about three years is established from the issuance.
  • Redemption premium: There is the possibility of establishing a premium in the issuance of these shares. It is an amount that the shareholder will receive at the time of redemption.

This part is a great advantage for the issuing entity. Well, you can redeem the shares when the interest rates are more favorable, and issue another at a lower rate.

Example of redeemable cumulative preferred stock

As we have seen, this type of action has advantages for both the shareholders and the issuing entity. Let's go by parts:

  • Advantages for the shareholder: The most notable thing is to have preference in the payment of dividends, provided that the entity has benefits to be distributed, with respect to ordinary shareholders. On the other hand, in the event that the entity does not distribute benefits, we have another advantage. And it is that those unpaid dividends accumulate, and will be received in full before paying ordinary shareholders.
  • Advantages for the issuing entity: An important part is that the shareholder does not have the right to vote at shareholders' meetings. This means that the ownership of the company is not diluted, as if it can happen with ordinary shares. On the other hand, their amortization gives the entity a great benefit. Being able, therefore, to amortize them early, when interest rates are lower, and to issue new ones at a lower cost.

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