Definition: Callable preferred stock gives the corporation the right to purchase/retire or “call” the stock from its shareholders at a specific future time and price usually determined at issuance. In other words, the company can force the shareholder to sell his stock back to the company at a given date in the future.
What Does Callable Preferred Stock Mean?
Preferred stock comes with many benefits and a few shortfalls. One of the biggest benefits of owning preferred stock is the preferential dividend treatment. When a company calls dividends, the company must pay all preferred shareholders dividends before any common stockholders receive a dividend payment.
One option that can be viewed as a shortfall of preferred stock is the callable option.
The call price usually includes the par stock value, a premium to give the stockholder a little more return on investment, and the remaining dividends in arrears. Corporations definitely have to carefully consider calling preferred stock before doing it. Assume you had preferred stock that hasn’t received a dividend in five years. These dividends are not lost; they are just in a holding tank called dividend in arrears.
It’s kind of like a corporation liability to the shareholders. When the corporation calls and retires your stock, it must pay you the par value of your stock plus a premium (both set at issuance) plus the five years of dividends that you haven’t received. This could be a pretty pricey proposition for the corporation if there are a lot of dividends in arrears.