Saturday, 23 April 2011

Hoohaa on Preference Shares - What are they?

Many companies seemed to be in a money-raising flurry lately in the growing Asia economy, thus providing various investment opportunities eg. bond issues, preference share issues, rights issue etc for eager investors. In attempt to find out more, I came across this article good for a casual read http://www.moneytalk.sg/2009/01/case-study-of-ocbc-preference-shares.html. So what exactly is Preference Share?

Here is the definition from Investopedia.com:

What Does Preference Shares Mean?

Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a company bankruptcy, preferred stock shareholders have a right to be paid company assets first. Preference shares typically pay a fixed dividend, whereas common stocks do not. And unlike common shareholders, preference share shareholders usually do not have voting rights.
Also referred to as preferred stock.
There are four types of preference shares: Cumulative preferred, for which dividends must be paid including skipped dividends; non-cumulative preferred, for which skipped dividends are not included; participating preferred, which give the holder dividends plus extra earnings based on certain conditions; and convertible, which can be exchanged for a specified number of shares of common stock.

A company may choose to issue PS because of
  • Flexibility of payments: Preferred dividends may be suspended in case of corporate cash problems.
  • Easier to market: The majority of preferred stock is bought and held by institutions, which may make it easier to market at the IPO.
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What are the differences between the two fixed income securities - Bond and Preferred Shares? Here's a chart I made to compare the two:


BondPreference Share
TypeDebtEquity
Maturity dateYes, but co may choose to redeem earlierNo, but there may be a call-back date which co may bring forward at their discretion
Traded on ExchangeYes (low liquidity)Yes (low liquidity)
PayoutFixed interest rate till maturityFixed / unfixed dividend

-subjected to the TYPE of preference share bought
- if no dividend is declared in the event of loss making, PS holders would not get any dividend (for non-cumulative PS)
- will get dividend before common shareholders
Sensitive to market interest rateYesYes
Voting rights to companyNoNo

Personally, I would prefer buying bonds if I am going to make long-term investment, simply because of the fixed payouts and maturity date given that both instruments have low liquidity.

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