Redeemable preferred stock

Redeemable preferred stock is a type of preferred stock that allows the issuer to buy back the stock at a certain price and retire it, thereby converting the stock to treasury stock. These terms work well for the issuer of the stock, since the entity can eliminate equity if it becomes too expensive.

The redemption feature tends to set an upper limit on the market price of the stock, since there is little point in bidding the price of a share above its redemption price. If the market price of this type of stock were to exceed the redemption price and the issuer were to redeem it, the holder of the stock would lose the difference between the market and redemption prices.

The redemption feature essentially places redeemable preferred stock somewhere on the continuum between equity and debt. It pays dividends, as do other forms of equity, but it may also be bought back by the issuer, which is a characteristic of debt.

In all other respects than the redemption feature, this type of stock matches the features of most types of preferred stock; that is, it pays a fixed dividend prior to any distributions to the holders of common stock. This dividend payment is usually cumulative, so that any suspended payments must be paid by the issuer before it can make any distributions to the holders of its common stock. Also, if the issuing entity is liquidated, the holders of preferred stock are paid off before payments to common stockholders are addressed.

There may also be a provision in redeemable preferred stock that the issuer can only buy back this type of stock on or after a certain date.

Redeemable preferred stock is also known as callable preferred stock or mandatorily redeemable preferred stock.

Related Courses

Corporate Cash Management 
Corporate Finance 
Treasurer's Guidebook