What is Participating Preferred Stock?
646 reads · Last updated: December 5, 2024
Participating preferred stock is a type of preferred stock that gives the holder the right to receive dividends equal to the customarily specified rate that preferred dividends are paid to preferred shareholders, as well as an additional dividend based on some predetermined condition. Participating preferred stock can also have liquidation preferences upon a liquidation event.
Definition
Participating preferred stock is a type of preferred stock where holders are entitled to receive dividends at a specified rate similar to other preferred shareholders, and may also receive additional dividends under certain predetermined conditions. In the event of liquidation, participating preferred stock may also have liquidation preference.
Origin
The concept of participating preferred stock originated in the late 19th century as companies sought to attract investors by issuing this type of stock. It became popular initially in the United States and Europe as a way to raise capital without diluting the equity of common shareholders.
Categories and Features
Participating preferred stock is mainly divided into two categories: cumulative and non-cumulative participating preferred stock. Cumulative participating preferred stock allows shareholders to accumulate unpaid dividends if the company fails to pay them, whereas non-cumulative does not have this feature. Key features include preferential dividend rights and priority in liquidation events.
Case Studies
A typical example is Apple's issuance of preferred stock in 2013, which, while not strictly participating preferred stock, illustrates how preferred stock can play a role in corporate financing. Another example is General Electric's issuance of preferred stock during the 2008 financial crisis, which helped the company navigate financial difficulties.
Common Issues
Common issues investors face when considering participating preferred stock include the stability of dividend payments and the actual value of liquidation preference. A common misconception is that dividends from participating preferred stock are always higher than common stock, which is not always true as it depends on the company's profitability and dividend policy.
