A type of preferred stock that cannot be bought back by the issuer
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Non-callable preferred stock (also known as non-redeemable preferred stock) is a type of preferred stock shares that do not include a callable feature. In other words, the issuer of non-callable preferred shares does not have the option to buy back the issued shares (call) at some predetermined price after a certain date. In this sense, non-callable preferred shares are similar to non-callable bonds.
Understanding Non-Callable Preferred Stock
Despite the lack of a callable provision, non-callable preferred stock shares have other features typical of preferred stock, including preference of dividends, preference in assets claim in case of the company’s liquidation, and non-voting clauses.
Non-callable preferred stock shares provide more protection to investors than redeemable preferred shares. The issuer of callable preferred stock has the option to buy back all issued shares if there is an opportunity to issue the shares with a lower dividend rate (e.g., when interest rates fall). This is a plus for the issuer but a risk for the shareholders.
Generally, even preferred shares with a callable feature have a non-callable period. Strictly speaking, callable preferred stock becomes redeemable only after a predetermined date (when the non-callable period expires).
Preferred shares with a non-callable provision also typically have a non-convertible provision. This means that the preferred shares cannot be exchanged for the company’s common shares in the future.
Valuation of Non-Callable Preferred Stock
The valuation of non-callable preferred stock is relatively more simple than the valuation of their callable counterparts. Essentially, the price of a non-callable preferred share equals the dividends paid by the stock, discounted at the cost of the preferred share at perpetuity. Mathematically, the relationship can be expressed using the following formula:
P = D/r
P – the price of a non-callable preferred stock share
D – the dividends paid by a non-callable preferred share
r – the cost of a non-callable preferred share
Note that the formula above is based on two main assumptions:
The preferred share is non-callable and non-convertible.
The preferred share does not have a maturity date and will pay dividends in perpetuity.
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