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Measures the mandatory dividend claim of preferred shareholders, exposing the senior cash obligation that reduces earnings available to common equity holders.
Preferred stock dividends are payments owed to holders of preferred shares. These payments are subtracted from profit before calculating earnings for common shareholders.
Preferred stock dividends are payments owed to holders of preferred shares. These payments are subtracted from profit before calculating earnings for common shareholders.
Characteristics of preferred dividends:
- Priority: Paid before common dividends
- Fixed rate: Usually a set percentage of par value
- Cumulative: Often accumulate if skipped; must be paid before common dividends resume
- Non-cumulative: Some preferred shares forfeit unpaid dividends
Why preferred dividends matter:
- EPS calculation: Subtracted from net income to calculate earnings available to common shareholders
- Cash obligation: Represents a regular cash outflow
- Capital structure: High preferred dividends indicate significant preferred equity financing
- Financial flexibility: Unlike debt interest, preferred dividends can sometimes be deferred
Analysis considerations:
- Coverage: Net income should comfortably cover preferred dividends
- Arrears: Check if cumulative dividends have been skipped and are accumulating
- Conversion features: Some preferred shares can convert to common, affecting dilution
- Call provisions: Company may have the right to redeem preferred shares
Preferred dividends are most common in financial companies and capital-intensive industries. For most companies, preferred stock is a small component of the capital structure.