Cumulative and non-cumulative preferred stock

Is there any difference in value between cumulative and non-cumulative preferred stock? Why, or why not?

While the difference is minimal in financially healthy companies, there is a significant difference in companies in financial distress. A company with outstanding cumulative preferred stock cannot pay dividends on its common stock unless all past dividends on the preferred issue have been fully paid. Financially healthy companies routinely pay all preferred dividends; to the preferred shareholders of these firms, the cumulative feature adds little value to the issue because it is highly unlikely that it will ever be invoked. However, companies in financial distress often are cash poor and elect to suspend preferred dividends in order to conserve their cash. To the preferred shareholders of these firms, the cumulative feature is critical to maintaining any value to the preferred shares at all.

2 Comments on "Cumulative and non-cumulative preferred stock"

  1. I have a simple question:

    Q1: Why would and an investor buy noncumulative preferred stock when cumulative stock is available from the same company at half the price per share?

    Syed Arbab Ahmed
    Khi., Pakistan.

  2. Dr.Vishaal Bhat | December 9, 2010 at 7:20 am | Reply

    @ Syed Arbab Ahmed

    Probably because Cumulative stocks do not guarantee returns for the investment at a later date.

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