A preferred share also called preferred stock, is just like any stock of a company. It represents part-ownership of the business, and people who acquire them have an interest in its commercial success. As mentioned in the discussion on what is a stock and how to buy shares from the stock market, the way to understand them is to learn how different they are from common stocks.
Preferred shares are acquired by people because of the dividends that they’re expected to receive and the fact that these dividends are paid to them first before owners of common stocks. In the event that the business goes bankrupt, owners of preferred shares are given priority on their entitlement to the company’s remaining assets, and they are paid out first than those who hold common stocks.
These privileges also come with a couple of downsides. For example, shareholders of preferred stocks don’t have any right to vote on important business decisions during annual stockholders’ meetings.
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How to buy preferred shares?
You buy preferred stocks the same way that you buy common stocks, through the stock market. However, they’re not traded frequently, and corporations don’t offer them as often as they do common stocks. There are also very few sellers willing to part with their holdings, so the volume of trade is really low if not none at all.
How do you know preferred shares from the common stocks? The name of the stocks bears the word “Preferred” or “Pref”. When these are offered on IPO, the announcement will also describe
Benefits of acquiring preferred shares
So what do you get in return when you purchase preferred shares? Here are the advantages that shareholders get.
The most obvious benefit is that you’re entitled to a fixed passive income. Companies would issue dividends as a priority to owners of preferred shares. Some corporations offer dividends upwards of 5% per annum and there are even a few that pay out double-digit rates.
The valuation of the shares is less volatile than the common stocks that are actively traded in the market. Their price remains arguably stable throughout the years, and they’re less likely to change as a response to any shifts in the market.
Another reason to purchase these shares is the way it offers investors a means to diversify one’s portfolios. They’re acquired for their opportunity to give steady annual income through the issuance of dividends rather than on the appreciation of their price, which could pose more risks.
In the instance that the company is going to be liquidated, people who have preferred shares have a prior claim to its assets than the rest of the shareholders. This is of course after all the liabilities and lenders are paid. The result is that your risks to the ownership of a failing corporation are less than the other shareholders.
One other advantage is that these shares are historically bought back by the companies. This buy-back program usually is announced via the Philippine Stock Exchange and leading newspapers. Some of the announcements contain how much the company would pay for each year and whether or not any years with missing dividends would be paid out.
For example, San Miguel Corporation announced that it would be redeeming 6-billion pesos worth of preferred shares this year. Ayala Corporation likewise informed the public of its plan to buy back preferred shares by November 2019, with all unpaid dividends of 5.575% annually until the redemption is paid.
Now, just like any other form of passive income investment, there are some downsides.
Whenever you receive the dividend, the income that you get is going to be dedicated to 10% tax. So even when corporations have issued a really good returns for your money, your take-home pay is lower because of the tax that you would need to pay.
Once you acquire these shares, it’s not easy to dispose of them. They are very few buyers and sellers for them in the market, so liquidity is an issue. You can’t buy or sell them whenever you want unlike stocks with very high liquidity. So when you decide to get out of this investment and get your money back, you might need to wait for quite some time or wait until the company begins a buyback program.
Recently, only two companies had bared their plans to issue preferred shares. In September 2019, Ayala Corporation said 15-billion-peso worth of preferred shares are going to be issued, while Century Properties Group (CPG) also is going to issue preferred shares with the value of 2 billion pesos.
Its advantage of less volatility can be its disadvantage too. There might be stocks where the rise in price may grow more than the income receive from dividends over time.
Updated list of Philippine preferred shares
|PRF2B||Petron Corp. – Perpetual Pref. Series 2B||1,001.00||102.87||10.28%|
|PRF2A||Petron Corp. – Perpetual Pref. Series 2A||1,000.00||94.50||9.45%|
|LRP||Leisure and Resorts World Corp.-Pref||0.99||0.09||9.09%|
|SMC2C||San Miguel Corporation Series 2-C Pref.||77.65||6.00||7.73%|
|PNX3B||Phoenix Petroleum – Non-Voting Pref. 3B||108.00||8.11||7.51%|
|PNX3A||Phoenix Petroleum – Non-Voting Pref. 3A||101.00||7.43||7.36%|
|FGENG||First Gen Corporation – Series G Pref.||111.90||7.78||6.95%|
|MWP||Megawide Const. Corp. – Perpetual Pref.||101.40||7.03||6.93%|
|SMC2F||San Miguel Corporation Series 2-F Pref.||76.50||5.11||6.68%|
|DDPR||DoubleDragon Properties Corp. Pref.||100.50||6.48||6.45%|
|SMC2G||San Miguel Corporation Series 2-G Pref.||76.80||4.93||6.42%|
|SMC2I||San Miguel Corporation Series 2-I Pref.||75.65||4.75||6.28%|
|SMC2E||San Miguel Corporation Series 2-E Pref.||75.60||4.74||6.27%|
|SMC2H||San Miguel Corporation Series 2-H Pref.||75.70||4.74||6.26%|
|SMC2D||San Miguel Corporation Series 2-D Pref.||75.50||4.46||5.91%|
|FBP2||San Miguel Food and Beverage, Inc. Preferred||995.00||56.57||5.69%|
|GTPPB||GT Capital Non-Voting Perpetual Pref ”B”||1,000.00||50.95||5.10%|
|PRF3B||Petron Corp. – Perpetual Pref. Series 3B||1,055.00||53.54||5.07%|
|GTPPA||GT Capital Non-Voting Perpetual Pref ”A”||990.00||46.30||4.68%|
|DMPA1||Del Monte Pacific Ltd A-1 Pref. (USD)||10.00||0.33||3.30%|
|DMPA2||Del Monte Pacific Ltd A-2 Pref. (USD)||10.28||0.33||3.21%|
|FPHPC||First Phil. Holdings Corp. Series C Pref||490.00||13.75||2.81%|
|TECB2||Cirtek Holdings – Pref B-2 (USD)||0.96||0.02||2.08%|
|PRF3A||Petron Corp. – Perpetual Pref. Series 3A||1,031.00||17.18||1.67%|
|SMCP1||San Miguel Corporation – Series 1 Preferred||74.00||1.06||1.43%|
|ACPB1||Ayala Corp. Class ”B” Series 1 Pref.||499.00||6.56||1.31%|
|ABSP||ABS-CBN Holdings Corporation “PDR”||15.40||0.00%|
|ACPA||Ayala Corporation Preferred Class “A”||500.00||0.00%|
|BCP||Benguet Corporation Conv. Pref. “A”||12.02||0.00%|
|DMCP||DMCI Holdings, Inc. – Preferred||1,400.00||0.00%|
|FGENF||First Gen Corporation – Series F Preferred||111.50||0.00%|
|FPHP||First Phil. Holdings Corp. – Preferred Series B||101.40||0.00%|
|GLOPA||Globe Telecom, Inc – Preferred “A”||5.00||0.00%|
|GLOPP||Globe Telecom, Inc. – Perpetual Pref.||500.00||0.00%|
|GMAP||GMA Holdings, Inc. “PDR”||5.30||0.00%|
|PPREF||Petron Corporation – Perpetual Preferred||107.30||0.00%|
|SFIP||Swift Foods, Inc. Conv. Pref.||1.36||0.00%|
|SMC2A||San Miguel Corporation Series 2-A Pref.||74.00||0.00%|
|SMC2B||San Miguel Corporation Series 2-B Pref.||76.05||0.00%|
|TLHH||PLDT – 10% Preferred Series HH||10.00||0.00%|
|ABC||Allied Banking Corporation – Pref. “A”||1,000.00||0.00%|
|ACPB2||Ayala Corp. Class “B” Series 2 Pref.||500||0.00%|
|ACPB||Ayala Corporation – Preferred Class “B”||523||0.00%|
Are preferred shares right for you?
They are suitable for investors who might want to acquire stocks without being exposed to their volatility, something that cannot be avoided with ownership of common stocks. Preferred shares allow investors to get into the equities market.
Equally important is the steady income it pays out. When companies couldn’t issue dividends for the year due to some reason or another, then there is a chance that these are paid when these shares are bought back later on.
Finally, they’re a great addition to a diversified portfolio. They dampen the effects of exposure to equities.