Perpetual preferred shares canada

Perpetual preferred share is a type of preferred share that pays a fixed dividend to investors for as long as the company remains in operation. It has no maturity or specific redemption date, but redemption features are typically present.

Unless redeemed, issued perpetual preferred shares will pay dividends indefinitely, assuming the issuer is still in business. These stocks are frequently traded on the same exchanges as common stocks.

Overview

• A perpetual preferred share is a type of preferred share that pays a fixed dividend for the duration of the company’s existence.
• Perpetual preferred shares do not have a maturity date or a specific date for repurchase, but they do have redemption features.
• The characteristics of perpetual preference stock are comparable to those of an extremely long-term bond.

Types of perpetual preferred shares

There are two distinct varieties of preferred stock: perpetual and non-perpetual. Perpetual preferred stocks have no expiration date and pay a fixed dividend for the duration of the issuer’s existence. Nonetheless, the Company reserves the right to repurchase the Shares at any time, subject to the terms outlined in the Prospectus. This repurchase period is essentially a common call feature on the bond market.

Companies repurchase perpetual preferred stock for a variety of reasons, including interest rate and tax law changes. Investors must keep this in mind, as losing their shares to a redemption results in an abrupt loss of income. For instance, if interest rates dropped below the dividend yield paid to shareholders, the company would likely repurchase the outstanding perpetual preference shares. As a result, investors were unable to reinvest their funds and receive the same dividend rate that had supported a steady income stream. Although not identical, a perpetual preference share shares similarities with an extremely long-dated bond.

Perpetual preferred stock pricing

Since perpetual preference shares can, in theory, exist forever, dividends must also be paid. In order to value these securities, one must calculate the present value (PV) of a terminal value, which is the fixed dividend amount divided by the dividend yield:

A non-perpetual preferred stock has a specified repurchase price and date, typically 30 or more years after the date of issuance. In addition, it has a specified maturity date and therefore provides greater cash flow security.

Preferred stocks vs. bonds

Investors invest in preferred stock because it combines the simplicity and liquidity advantages of common stock with the fixed income advantages of bonds. All holders of preferred stock have priority over holders of common stock. This preference is significant in the cases of dividend payments and voluntary asset liquidation, but it is indispensable in bankruptcies. During a bankruptcy, preferred shareholders have the first opportunity to liquidate the business. In this situation, preferred stock provides greater protection than common stock.

However, unlike common stock, preferred stock investors do not directly benefit from a company’s earnings growth. Only the dividend applicable to the purchase of their shares is payable to them. For instance, an investor will purchase preferred stock if the annual dividend payment is $10. Later, the company increased the annual payment to $15. The preferred stockholder receives only a dividend of $10, while the common stockholder receives a larger dividend.