Preferred stock is issued by corporations to raise capital and is similar to common stock but typically carries a higher dividend yield and less volatility than common stock. Investors like preferred stock because it is perceived to have less risk than other investments. In the capital structure of a company, preferred stock ranks above common stock but below bonds. This means that if a company liquidated the bondholders would see their claims paid first, followed by preferred stockholders and finally common stockholders.
Some financial publications carry quotations on preferred stock so investors can track performance. The Wall Street Journal has a section on its website that provides quotes and other information on preferred stock. Investors can also go directly to the exchange where the preferred issues are listed. The NYSE Euronext has quotes on all the preferred stocks listed on its exchange. (See Resources.)
Alcoa has an issue of cumulative preferred stock that pays a $3.75 per share dividend. Alcoa had 546,024 shares of this preferred stock outstanding on December 31, 2008. The cumulative dividend provision protects holders of preferred stock because if the company misses any dividend payments it must make them up prior to paying any dividends to common shareholders.
Double Eagle Petroleum
Double Eagle Petroleum has outstanding the 9.25 percent Series A Cumulative Preferred Stock. The company issued 1.61 million shares of the preferred stock in July 2007 at a price of $25 per share. Double Eagle Petroleum is obligated to pay a dividend of $2.3125 per share each year, payable in quarterly installments. This dividend is calculated as 9.25 percent of the issue price of $25.
Edge Petroleum has outstanding the 5.75 percent Series A Cumulative Convertible Perpetual Preferred Stock. The preferred stock was issued in January 2007, and 2.875 million shares are outstanding as of June 30, 2009. Each preferred share is convertible into 3.0193 shares of the company’s common stock. Edge Petroleum stopped making dividend payments on its preferred stock, and was in arrears for $5.9 million of dividend payments as of June 30, 2009.
Airspan Networks recently issued 1.25 million shares of Series C Convertible Participating Preferred Stock. Each share of preferred stock is convertible into 100 shares of common stock at a price of $1.20 per share.
During the peak of the financial crisis in late 2008, the federal government initiated the Capital Purchase Program (CPP), which was a component of the Troubled Asset Relief Program (TARP). The CPP involved the investment by the U.S. Treasury into hundreds of financial institutions. The U.S. Treasury received shares of preferred stock in return for the investment.
The preferred stock carries a 5 percent cumulative dividend rate for the first five years, and then resets to a 9 percent dividend, and the shares are callable after three years at par. This means that the issuing institution can buy the preferred stock back from the holder.