In the complex landscape of corporate finance, preferred stock stands as a unique class of investment that offers investors a blend of debt and equity characteristics. This article delves into the world of US companies with preferred stock, exploring what it is, how it works, and why it’s an attractive option for both investors and corporations.

What is Preferred Stock?

Preferred stock is a type of security that represents ownership in a company, but with a higher claim on assets and earnings than common stock. Unlike bonds, preferred stock does not entitle the holder to a fixed interest payment, but it does offer certain preferential rights, such as a higher dividend payment and priority in the event of bankruptcy.

Key Features of Preferred Stock

1. Dividends: Preferred stock usually pays a fixed dividend, which is typically higher than the dividend paid on common stock. This makes it an attractive investment for income-seeking investors.
2. Priority Over Common Stock: In the event of bankruptcy or liquidation, preferred stockholders have a higher claim on assets than common stockholders.
3. Liquidity: While preferred stock can be less liquid than common stock, it is generally more liquid than bonds.
4. Callable: Some preferred stocks are callable, meaning the issuer can redeem them at a predetermined price before their maturity date.

Why Invest in Preferred Stock?

Investors are drawn to preferred stock for several reasons:

• Income: The fixed dividend payments make preferred stock an attractive investment for those seeking regular income.
• Capital Preservation: Preferred stock offers a higher level of capital preservation compared to common stock, as it has a higher priority in the event of bankruptcy.
• Liquidity: While less liquid than bonds, preferred stock is generally more liquid than common stock, making it easier to sell when needed.

Case Studies

Let’s look at a couple of examples to illustrate the use of preferred stock:

1. Bank of America: In 2013, Bank of America issued $2.5 billion in preferred stock to raise capital and improve its financial stability. The preferred stock offered a 6% dividend yield, making it an attractive investment for income-seeking investors.
2. Procter & Gamble: In 2014, Procter & Gamble issued $2 billion in preferred stock to fund its share repurchase program. The preferred stock offered a 5.25% dividend yield, demonstrating how companies can use preferred stock to finance various corporate activities.

Conclusion

Preferred stock is a versatile investment that offers a unique combination of income, capital preservation, and liquidity. For investors seeking a balance between the stability of bonds and the potential growth of common stock, preferred stock is an excellent option. As the corporate landscape continues to evolve, preferred stock will likely remain an important part of the investment landscape.