Preferred Stock


Z

zxcvbob

How do I tell by looking at the prospectus for a preferred stock whether
it is cumulative or not? I searched the prospectus for GJM (general
motors acceptance corp preferred) and the work "cumulative" never
occurs. It does say:
The Notes will be unsecured obligations of the Company and will rank
equally with all other unsecured and unsubordinated indebtedness of
the Company. The Notes will be redeemed at par on August 8, 2032. The
Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after August 8, 2007, upon not less than 30
nor more than 60 days’ notice, at a redemption price equal to 100% of
the principal amount redeemed plus accrued and unpaid interest to the
redemption date.
http://www.preferredstockonline.com/members/sheets/GJM.htm

Does the reference to "unpaid interest" mean it is cumulative? Or
perhaps the references to "debt" and "interest" rather than "equity" and
"dividend". Or if GMAC skips an interest payment, do they not have to
make it up until the note matures in 2032 (or whenever they are called
away)?

I assume this is really easy if I knew the lingo.

Thanks, and best regards,
Bob
 
Ad

Advertisements

E

Elle

Here's a statement from the prospectus of the cumulative preferred stock
ACE-C (also known as ACEPRC) that looks a lot like the prospectus statement
you posted:

"On or after May 30, 2008, ACE has the option to redeem all or a portion of
the Preferred Shares, at $250 per Preferred Share, which is equivalent to
$25 per Depositary Share, plus accrued and unpaid dividends, if any, to the
date of redemption."

Note that GJM pays interest, whereas ACE pays dividends, so the tax
treatment is different. That may be the only relevant difference here. I
don't have a more definitive answer right now, but maybe this will help.

Incidentally you might want to spend some time at www.quantumonline.com and
study comparable offerings to GJM. Quantum states that the conventional
wisdom is to not buy preferred etc. stock with a call date less than about
3 years. GJM is callable in 2.5 years. Registration at Quantum is free. I
have found this site very helpful and pretty accurate (after
double-checking many of its numbers for many stocks).
 
B

beliavsky

Elle said:
Incidentally you might want to spend some time at
www.quantumonline.com and
study comparable offerings to GJM. Quantum states that the conventional
wisdom is to not buy preferred etc. stock with a call date less than about
3 years.
I think this advice is too general. If the current market price of the
preferred is well below the call price, callability probably is not a
big concern, since the issuer could more cheaply buy back the preferred
stock in the secondary market. Even if the market price exceeded the
call price, one would need a bond option pricing model to determine if
the preferred stock were a good investment.
 
E

Elle

If the current market price is well below the call price, then callability
may not be a concern, but the health of the issuing company may be. A
"sick" company doesn't necessarily have to keep paying dividends (or
interest, as the case may be). In this vein, GMAC doesn't have the greatest
credit ratings lately. For my portfolio, it's a little more risky than I
can tolerate. Bob's situation may differ.

As for determining whether a preferred stock is a good investment using a
bond option pricing model: Just my opinion, but I suspect what the market
is currently valuing a bond or preferred stock at, compared to similar
bonds and preferred stocks, would, it seems to me, be about as useful.
 
W

Will Trice

Elle said:
Note that GJM pays interest, whereas ACE pays dividends, so the tax
treatment is different.
Is the tax treatment different? I'm under the impression that the
dividends from the preferred stock of most companies don't qualify for
the 15% dividend tax rate. Is this incorrect, or have you found that
they typically are qualified?

-Will
 
Ad

Advertisements

E

Elle

Will, your point is fair. Here's my amendment:

In Quantumonline's table of "Preferreds Eligible for the 15% Tax Rate," 594
stocks appear (among them, ACE-C (a.k.a. ACEPRC). In its table of "All
Preferred Stocks," 1076 stocks appear. So it appears that a slim majority
of preferreds currently are eligible for the 15% tax rate. Quantumonline
does have a long disclaimer and discussion on this subject, essentially
saying this tax law is so new that the tax treatment of payments from
preferreds is not yet always transparent.

This may raise the issue of whether its simply an "interest vs. dividends"
breakdown. I think that's kind of an academic point and off the beaten path
of financial planning, so I'll leave it alone.
 
Ad

Advertisements

T

Tad Borek

zxcvbob said:
How do I tell by looking at the prospectus for a preferred stock whether
it is cumulative or not? I searched the prospectus for GJM (general
motors acceptance corp preferred) and the work "cumulative" never
occurs.
Bob-
"Cumulative" is a term used in connection with preferred stocks, and
that security isn't a preferred stock. It may be listed alongside
preferreds but it's a note, which is debt/lending to the company rather
than equity/ownership of the company.

For the most part you might not care about the distiction, it's a
tradeable security that pays you a stream of income. But the tax
treatment is different for each and the analysis is a little different
for each.

In corporate finance "preferred stock" has a specific meaning but
unfortunately its usage has become too broad, including things that
aren't true preferreds - like REITs and notes like the one you mentioned.

-Tad
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top