Perpetual preference shares are a type of hybrid equity security that pays fixed dividends indefinitely without a redemption date. These shares combine elements of both debt and equity financing.
These shares require companies to pay regular dividends, typically at a fixed rate. Unlike ordinary shares, they don't carry voting rights. However, their dividends must be paid before common shareholders receive any dividends. If the company faces financial distress, perpetual preference shareholders rank above common shareholders for dividend payments and asset distribution during liquidation.
Perpetual preference shares are often callable, meaning the issuing company can redeem them after a certain period, usually at par value or a premium. This feature provides flexibility to companies while offering investors a potential exit strategy.
The key features of perpetual preference shares include:
Companies issue perpetual preference shares to strengthen their capital structure without diluting control. The fixed dividend payments are often lower than interest payments on debt, making them an attractive alternative to traditional borrowing., since these shares don't carry voting rights, existing shareholders maintain control over company decisions.
Many people confuse perpetual preference shares with common shares or bonds. Unlike common shares, perpetual preference shares don't carry voting rights and have priority for dividend payments. Compared to bonds, they don't have a fixed maturity date and their payments are considered dividends rather than interest, which may offer tax advantages in some jurisdictions.
Another misconception is that perpetual preference shares are always safer than common shares. While they do have priority for dividend payments and asset distribution, they still carry risk, especially if the issuing company faces financial difficulties and chooses not to pay dividends.
| Advantages | Disadvantages |
|---|---|
| Lower cost of capital compared to debt | Dividend payments are not tax-deductible (in most jurisdictions) |
| Maintains existing shareholder control | Potential for higher dividend payments during financial distress |
| Flexibility through callability | May dilute earnings per share for common shareholders |
Perpetual preference shares offer companies a flexible way to raise capital while maintaining control and potentially reducing financing costs. For investors, they provide a steady income stream with priority over common shareholders. However, it's essential to understand their unique characteristics and risks before investing.