RE:RE:RE:RE:RE:RE:RE:Prefered shares. I tend to think of pref shares as debt (in a good way) in that they generally do not participate in the growth of the company, as do common shares. Rather, they are usually only entitled to a fixed return on investment by means of a special dividend per share. Unlike debt; however, the shareholders usually have little or no control over the timing of the realization of their investment (i.e.: they cannot unilaterally demand to have their shares repurchased. They must rather rely on the ability to trade the shares in an active market or rely on the company to choose to call the shares for redemption). In my opinion, this is a great alternative to debt financing, for a company. One would normally think that a preferred share's lower ranking in the capital structure of a company (junior to debt) would garner it a higher rate of return than that afforded to debt. Due to the added liquidity provided by an active market; however, it is not unusual for preferred share dividends to yield 4-5% - which may be less expensive to the company than its cost of debt. In such a case, the common shareholders could very well be better served to have less annual earnings doled out in the form of dividends on preferred shares than interest on debt, PLUS have the luxury of choosing whether or not to retire any of the preferred shares, in any given year. I think that it is prudent for ALL companies (both public and private) to have the ability to issue various types of shares for various purposes, as needed in the circumstances. I find it to be a pain in the butt to have to go to the lawyers and get special directors' resolutions drawn up and signed and the company's articles of incorporation amended at the "eleventh hour", just because no one had the foresight to consider that the company would ever need to issue a particular type of share.
MORAL of the story - if any of you have a company, please make sure that it's articles don't state that it is only authorized to issue "an unlimited number of common shares".
sal_bando wrote:
Preferred's are listed in the equity section of the balance sheet and are not considered to be debt. You can't have it both ways. They are either diluting or they are piling on debt. You can't say that they are doing both by issuing preferrred's.