Cumulative preferred shares and their types. Registered shares: preferred, cumulative, ordinary, convertible and vinculated

Preference shares can be issued in various types, the main ones being the following.

Based on the possibility of accumulating unpaid dividends, a distinction is made between cumulative and non-cumulative preferred shares.

Cumulative preferred shares suggest that if, due to difficult financial situation or any other factors, dividends are not paid in the current year, then they accumulate in dividend arrearage and will be paid in subsequent years. As a rule, the period for accumulating dividends does not exceed three years. All arias must be paid prior to the payment of dividends on common shares. Because dividend payments are not part of the firm's debt obligations, preferred stockholders may receive no dividends at all if the firm does not intend to pay dividends on common stock.

Non-cumulative preferred shares are shares for which, in the event of non-payment of dividends for the current year, their accumulation is not carried out and the holders of which cannot count on receiving dividends in subsequent years. Thus, the firm can pay dividends on common stock even though it did not pay dividends on preferred stock in previous years. For an investor, non-cumulative preferred shares are of little interest, since there are no guarantees of payment of dividends, and in the event of liquidation of an enterprise, they are in penultimate place in satisfying property rights. In this regard, foreign companies very rarely issue non-cumulative preferred shares.

Based on the stability of dividends paid, a distinction is made between shares with a fixed dividend and shares with an additional dividend. For preferred shares with a fixed dividend, upon issue, the dividend amount is established, which remains unchanged throughout the entire period. The share is a perpetual security. As such, both the issuer and the investor bear interest rate risk. If interest rates decline in subsequent periods, the issuer will have to pay the increased dividend on preferred shares established at the time of issue, when interest rates were quite high. If rates begin to rise, the risk is transferred to the investor, who will receive a fixed dividend that does not reflect the real situation on the market.

Recently, preferred shares with the right to receive an additional dividend, which are sometimes called “participating” shares, have begun to be used in practice. For such shares, a lower limit for the dividend is established, which the company undertakes to pay regularly, and the conditions for the payment of additional dividends are stipulated. Such conditions may provide that if the dividend on ordinary shares is higher than on preferred shares, then an additional dividend is paid on the latter so that the total amount of dividend payments corresponds to the level of dividend on ordinary shares. For example, the lower limit of the dividend on a preferred share is set at 5 rubles, and on ordinary shares it was decided to pay a dividend in the amount of 7 rubles. In this case, an additional dividend equal to 2 rubles will be paid on preferred shares. In order to reduce interest rate risk, preferred shares are issued with an adjustable dividend rate. These shares first appeared in 1982 in the USA. The size of the quarterly dividend paid on preferred shares is tied to the level of yield on government securities. The dividend amount changes quarterly, reflecting changes in yields on the government securities market. It should be noted that the dividend is not equal to the average yield, as there are two restrictions. Firstly, a profitability corridor is established for the investor, i.e. lower and upper limits of profitability. The specific dividend amount is determined within a given interval. For example, the lower limit of profitability can be set at 4%, and the upper limit at 10%. The dividend can be 5-10% depending on the yield on 3-month Treasury bills, 10-year and 20-year government securities. Secondly, when setting a dividend, a discount is made from the yield on government bonds. This is due to the fact that the return on shares consists of two components: dividends and increases in market value. Therefore, when establishing a dividend on preferred shares, a discount is usually made in the amount of 0.5-1.5% from the level of yield on government securities.

This approach to calculating dividends on preferred shares reduces the degree of risk to a certain extent, but it cannot be completely avoided. If the yield on government securities exceeds the established upper dividend limit, the issuer will pay the investor a dividend only within the established yield corridor.

In 1985, preferred shares were issued in the United States with an auction dividend rate. The technology for determining the dividend amount is as follows. The bank or financial company that handles the placement of the firm's preferred shares holds stock auctions every 49 days. Those wishing to purchase preferred shares submit applications indicating the number of shares to be purchased and the expected dividend. Having received bids, the auction organizer summarizes them and determines an acceptable level of profitability. Applications in which the desired dividend is lower than that established by the bank are satisfied, and the applicants purchase the required number of shares. Applications with a dividend level exceeding the amount established by the bank will not be satisfied.

The auction is conducted according to the Dutch system, i.e. all winners receive preferred shares with the same dividend level. The auction method for determining the size of the dividend allows you to link the profitability of preferred shares to the actual situation on the market. As a result, auction rate preferred shares are much more popular than adjustable rate preferred shares. Investors prefer to purchase this type of stock. However, in some cases they face liquidity problems. Shares are easy to sell if there are enough buyers participating in the auction. If the number of buyers is small, based on the submitted applications, the level of profitability of which satisfies the auction organizer, then it is quite difficult to sell the shares.

The adjective “cumulative” comes from the Latin verb cumulare, translated meaning – to add, fill, complete. Thus, it reflects a certain cumulative effect in relation to the noun with which it is used.

The cumulative effect is widely used in explosives; it is also used in the production of armor-piercing shells and in mining. Well, besides this, as you can see, it can also be found in such an area of activity as investing in the stock market (and to be more specific, in investing in shares).

Below we will talk about what is commonly called cumulative shares in the stock exchange world. We will look at their main types and characteristic features. First of all, all cumulative shares should be divided into two main categories:

Cumulative ordinary shares;
Cumulative Preferred Stock.

Cumulative ordinary shares

Ordinary shares, as is known, give their owner the right to vote at the general meeting of shareholders of the company, but do not guarantee him the payment of dividends. That is, he, of course, can receive them, but only if, firstly, the general meeting decides to use part of the company’s profits to pay dividends, and secondly, if after payments on preferred shares (and other primary obligations) There will generally be free funds left.

So, cumulative ordinary shares are those whose income is paid not in money, but in the same ordinary shares of the company. That is, the shareholder receives a replenishment of his capital due to an increase in the number of shares in his portfolio.

The main feature of cumulative ordinary shares is the fact that income received not in cash, but in the form of securities, in this case is not subject to income tax (however, it should be borne in mind that in this case there is a tax on the increase in the market value of capital ).

Cumulative preferred shares

Preferred shares are those shares of a company on which dividends are paid on a priority basis. That is, for example, in the case when the income received by a company in the current year does not allow it to satisfy the needs of all its shareholders, dividends are paid only to owners of preferred shares. By the way, even if the company goes bankrupt, they will be the first to receive their share. The other side of the coin here is the fact that such shares do not provide voting rights at the general meeting of shareholders. That is, their possession does not give the right to participate in the management of the company.

By the way, if there is a debt on such shares, then their owners receive the right to vote at all shareholder meetings until this debt is fully repaid. This, to some extent, serves as a certain incentive to quickly settle accounts with the owners of cumulative preferred shares and not share votes with them.

Cumulative shares are those preferred shares on which dividends can accumulate. That is, if for any reason they were not paid (or were not paid in full), then their amount (or the amount of their unpaid part) is added to the next payment. Moreover, this payment of debt occurs again in priority order (before dividends are accrued on the remaining ordinary and preferred shares).

When a company faces financial problems and is unable to meet all of its obligations, it may suspend dividend payments and focus on paying specific expenses and paying down debt. Once the company regains its footing and begins paying dividends, common shareholders and even preferred shareholders will not receive any compensation for the period when payments were suspended. Moreover, they will not receive their dividends until all debt on the cumulative preferred shares has been paid. But holders of cumulative shares will receive all dividends due to them in full (including those that they did not receive during the period of suspension of payments).

A simple example of calculations for cumulative preferred shares

Here is a simple example of calculating dividends on cumulative preferred shares. Let's say a company issued such shares with a par value of $1000 and an annual interest rate of 5%. The following year, another economic crisis occurred and the issuing company was able to pay not the entire due amount for these shares, but only half of it. Shareholders receive income of $25 per share, and the company owes them the remaining $25.

And after another year, the company’s financial condition does not allow it to pay dividends at all. Then the debt on cumulative preferred shares increases by another $50 (per share). Thus, the company's total debt is already $75 per share.

Finally, in the third year of operation, the company emerges from the crisis and can afford to pay dividends. Then, as a matter of priority, the debt on cumulative preferred shares is repaid in the amount of $75 of debt plus $50 for the current year, for a total of $125 for each such share.

And only after this, the company can afford to pay dividends on all other types of its shares - first on preferred ones, and then on ordinary ones (if, of course, there is some money left by this time).

Registered shares are securities issued in the name of a specific person and registered in the register of a shareholder company. In other words, these shares must bear the name of their owner.
The specified person is a full member of the company's board of shareholders.

The sale and transfer of registered stocks occurs in two ways

1. Entering information about the change of owner into the company register, issuing the corresponding certificate to the new shareholder

2. Applying an endorsement on the certificate itself, after which it is also necessary to enter it into the register.

In addition to the data of the new owner, it is also necessary to indicate the date of transfer and confirm it with the signature of an official. The endorsement on the reverse side of the share is called an endorsement.

Naturally, they have value only when they are in the hands of a registered owner, in contrast to bearer shares, the owner and beneficiary of which can be absolutely any unregistered person. The main purpose of the existence of registered shares is strict accounting of the company's shareholders and the avoidance of attracting unwanted capital to the company.

Actually, at the birth of the securities market, there were only registered shares.
Of course, if a company issues exclusively registered shares, and not preferred ones, this significantly increases its prestige.

Types of registered shares

A subtype of registered shares is vinculated shares. They can be transferred to third parties only with the permission of the issuer - company, joint stock company. The purpose of their issue is precise control over the composition of shareholders. Essentially, this is a tool for prohibiting the sale and transfer of shares to undesirable persons.

Preferred shares are also registered; their owners have the right to receive dividends in a fixed and priority order. A subtype of preferred shares are convertible shares that can be exchanged for ordinary shares at a predetermined ratio.
Registered ordinary (common) shares mean that their owners receive dividends on a residual basis after holders of preferred shares.

Cumulative shares are registered, preferred shares that provide the right to receive dividends accumulated during the period when, for any reason, the company did not pay them.
Another type of registered shares is convertible - they can be exchanged for ordinary and preferred shares at a strictly fixed price within a specified period.

Cumulative shares are ordinary securities that are issued to shareholders in lieu of dividends. The very concept of “cumulative” has a cumulative nature in relation to the object with which it is used.

Let's consider what cumulative shares mean in stock trading, their distinctive features and varieties. First of all, it should be noted that they are privileged and ordinary.

Ordinary cumulative securities

Regular securities usually give voting rights to the shareholder at the relevant meeting of the company, however, this is not a guarantee that the shareholder will receive dividends. In other words, receiving dividends is possible only if a decision is made at a meeting of shareholders to allocate partial profits of the joint-stock company for their payment, and also if, after paying off priority obligations, which include payments on preferred securities, the enterprise will have funds left.

An ordinary cumulative share is a security for which payment is made not in cash, but in the same ordinary shares of the enterprise. In simple words, the owner of securities replenishes his own capital by increasing their number in the investment portfolio.

The main distinguishing feature of ordinary cumulative securities is that the above payment, made in the form of shares and not in cash, is not subject to income tax deduction.

Preferred cumulative securities

Preferred shares are not cumulative in the following case - if payments on them are made in priority order. This happens if the joint stock company received such a profit for the current period that it is not possible to pay dividends to all owners of the securities. As a result, only shareholders owning preferred securities remain priority. If the company suddenly goes bankrupt, they will also receive their share of the payments first. However, there are also disadvantages here - central banks of this type do not provide voting rights at a meeting of the company’s shareholders, and their holder does not have the right to participate in the management of the joint-stock company.

It should be noted that if a debt arises on the above shares, shareholders owning this type of securities are given the right to vote at shareholder meetings until the debt is fully repaid. This is a kind of motivation for quick settlements with holders of preferred securities.

Cumulative preferred shares are securities on which dividends can be accumulated. In other words, if for a certain reason they were not paid, or dividends were paid partially, the unpaid amount is added to the subsequent payment. In this case, debt repayment is carried out again as a matter of priority, before dividends are accrued on other shares, both ordinary and preferred.

If a joint stock company is experiencing financial difficulties and is unable to fully fulfill its obligations to shareholders, dividend payments may be suspended to allow the company to focus on paying off certain debts and expenses. After the company gains stability and resumes dividend payments, shareholders - whether ordinary or preferred - will not be compensated for payments for the period of financial difficulties of the company. Moreover, payments will not be made until the company pays dividend debts to the owners of preferred cumulative securities.

Cumulative shares and non-cumulative shares also differ in that in this case the owners of cumulative shares will be paid the debt in full, even for the period in which payments were suspended.

Dividend calculation example

Consider the following example. Let's assume that the company issued shares with a par value of 1,000 US dollars. The annual interest rate is 5%. A year later, another economic crisis occurred. The company that issued the securities is not able to pay dividends to them in full, but can only pay 50% of the amount. As a result, the owners of the securities receive a dividend profit per share of 25 US dollars and the company owes them the same amount.

A year later, the financial situation of the company worsened and dividend payments were suspended completely. At the same time, the debt on preferred cumulative securities increases by another 50 US dollars. Consequently, the amount of debt of this joint stock company reaches 75 US dollars per share.

A year later, the company overcomes the economic crisis and begins paying dividends again. In such circumstances, priority is given to the debt on the cumulative preferred notes in the amount of US$75 per share together with the current amount of US$50. The total dividend amount is $125.

Only after repayment of the debt can the joint-stock company resume payments on other types of shares, starting with preferred and ending with ordinary shares, if at that moment the company still has cash left.

1.3 Preference shares (cumulative and convertible)

A preferred share does not give the right to vote at the general meeting of shareholders, and the privileges of the owner of such a share are that the charter must determine the amount of the dividend and (or) the value paid upon liquidation of the company (liquidation value), which are determined in a fixed amount of money or as a percentage of the par value of preferred shares.

The Law on Joint Stock Companies provides for the issue of one or more types of preference shares.

The law distinguishes two types of preferred shares: cumulative and convertible.

Cumulative shares are those for which the unpaid or incompletely paid dividend, the amount of which is determined in the charter, accumulates and is paid subsequently.

For example, if during the issue of preferred shares it was established that the dividend on them is paid in the amount of 14% of the par value, and by decision of the general meeting of shareholders it is not paid this year, then in the next calendar period the dividend on the cumulative preferred share will be 28%.

The owner of a cumulative preferred share receives voting rights for the period during which he does not receive a dividend and loses this right from the moment all accumulated dividends on the specified share are paid in full.

When issuing convertible preferred shares, the possibility and conditions for converting (exchanging) such shares into ordinary shares or other types of preferred shares must be determined. When issuing convertible shares, it is necessary to establish the period, proportionality and exchange rate (Fig. 1).

Fig.1. Scheme for issuing preferred convertible shares

The charter may give the owner of a convertible preference share the right to vote at a general meeting of shareholders, and the number of votes must correspond to the number of ordinary shares for which his preference share is exchanged.

Revocable, or returnable, preferred shares have become widespread. Their essence is that they can be redeemed, unlike ordinary ones, which cannot be redeemed as long as the joint stock company that issued them exists.

A joint stock company can provide revocation or repayment in different ways:

1. Redemption with a premium. The premium acts as a kind of compensation to the investor for losing his source of income. In this case, the repurchase can occur in full at any time after notification of the repurchase or in parts within the established time frame. Redemption occurs at a price that is set above the face value, taking into account unpaid dividends.

2. Redemption through redemption or deferred funds. The formation of a redemption fund makes it possible to annually repurchase a certain part of revocable preferred shares through the secondary market and thereby help stabilize the market for one’s shares.

3. Providing guarantees for early redemption at the initiative of the holder through the issuance of so-called retractive preferred shares. Their issuance is resorted to when the issuer does not have absolute guarantees of recall of preferred shares through redemption through redemption. Thus, the block diagram for issuing revocable (returnable) preferred shares can be presented as follows (Fig. 2).

In foreign practice, preferred shares with a floating dividend rate, focused on the yield of any generally recognized securities (for example, in our practice, on the yield on GKOs), are becoming widespread.

Rice. 2. Scheme for issuing revocable (returnable) preferred shares

Guaranteed preference shares may be issued. Such shares may be issued by subsidiaries. In this case, the dividend on preferred shares is guaranteed by the reputation of the parent organization. This should attract investors to purchase shares in the subsidiary.

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