What is Callable Preferred Stock?

Business Knowledge

Callable preferred stock is a type of preferred stock in which the issuer has the right to call in or repurchase the stock at a specific price after a specified date. Callable preferred stock terms, such as the call price, the date after which it can be called, and the call premium are all mentioned in the terms of the prospectus. callable preferred shared terms can be laid while issuing stock, and such price cannot be changed later at any time or at the time of redemption.

Features of Callable Preferred Stock

There are some important features of such stocks:

  • Owners can hold the risk of being called back. The strike-price premium means where owners compensate the holder for certain bases or for all of the risks.
  • These stocks certainly pay a dividend regularly to keep the shareholders attracted. However, it can be challenging for investors who depend on the same source of income.
  • One should note that the price of callable preferred stock is impacted by whether the call is in-the-money, out of the money, or at the money.
  • In terms of dividend and liquidation, they get preference over the common stockholders.
  • These stocks issue as Cumulative, Participating, Callable, and Convertible.
  • Callable preferred stock is a variety of preferred shares that may be redeemed by the issuer at a set value before the maturity date.
  • Issuers use this type of preferred stock for financing purposes as they like the flexibility of being able to redeem it.
  • Investors enjoy the benefits of preferred shares, while also usually receiving a call premium to compensate for reinvestment risk if the shares are redeemed early.

Advantages of Callable Preferred Stock

  • Since the shares can be repurchased after the call date, issuers can permanently avoid a situation of giving up a majority interest in the company. This aspect can give them an upper hand during crises.
  • Voting control can be maintained as preferred shares are classified as non-voting shares.
  • The funding costs can be kept under control.
  • Common shares can be made available for equity incentive plans.
  • The call price for repurchasing the shares at the time of prospectus execution; allows organizations to strategize the timing of the call when they have surplus cash with them.

Disadvantages of Callable Preferred Stock

  • Investors may be unwilling to pay as much as equity subject to call.
  • The perceived value of the callable preferred stock is unlikely to be higher since they have less potential for the upswing. Therefore, investors who are anticipating a bullish market/stock must cash in on such shares before the issuer announces a call. A call announcement generally plummets the share value towards the par value. It sends a signal that there could be some issues in the management, and such a step is required to be taken.
  • Another angle highlights the ‘call price premiums’ which guarantee a return even if the market is underperforming. It may be a costly option, but investors should consider such options if their investment objective involves consistent returns.
  • The addition of security classes can complicate the corporate structure, which further imposes compliance costs. It can further expose loopholes in the funding structure. Dividends to the common shareholders will not be considered unless preferred shareholder dividends are paid incompletely. Callable preferred stock can generally be a problem if you offer high dividend rates for preferred stock shareholders.
  • If the call price turns out to be lower than the existing market price, the investor loses part or entire capital gains if the firm decides to call the shares.

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