In my last post, I talked about hybrids but I stuck with the conventional example of convertible debt. In this one, I would like to draw attention to another source of financing - preferred stock - which I find much more difficult to work with. Before I begin, though, let me also draw a distinction between preferred stock in the United States and preferred stock in some other parts of the world (such as Brazil). In the United States, preferred stock commands a fixed dollar dividend that is set at the time of the issuance. If you buy preferred stock, your returns come primarily from the dividends - any price appreciation (or depreciation) is a side story. In much of Latin America, preferred stock is really common stock with preferential claims on dividends and limited voting rights. The dividends are usually specified as a percentage of earnings (rather than as an absolute number) and will go up, if the company is doing well, and go down, if not. Returns therefore mirror returns on common stock, with dividends and price appreciation.
Preferred Stock: Fish or Fowl?
Preferred Stock: Fish or Fowl?
Preferred Stock: Fish or Fowl?
In my last post, I talked about hybrids but I stuck with the conventional example of convertible debt. In this one, I would like to draw attention to another source of financing - preferred stock - which I find much more difficult to work with. Before I begin, though, let me also draw a distinction between preferred stock in the United States and preferred stock in some other parts of the world (such as Brazil). In the United States, preferred stock commands a fixed dollar dividend that is set at the time of the issuance. If you buy preferred stock, your returns come primarily from the dividends - any price appreciation (or depreciation) is a side story. In much of Latin America, preferred stock is really common stock with preferential claims on dividends and limited voting rights. The dividends are usually specified as a percentage of earnings (rather than as an absolute number) and will go up, if the company is doing well, and go down, if not. Returns therefore mirror returns on common stock, with dividends and price appreciation.