What is Noncumulative?
Noncumulative refers to a type of preferred stock for which dividends are not accumulated over time. The company is not obliged to pay noncumulative stockholders any unpaid dividends.
For example, if a company fails to pay dividends over two years and pays out in the third, noncumulative stockholders only have claims on the dividends from the third year. On the other hand, cumulative stockholders are entitled to collect the unpaid dividends.
Cumulative Stock vs. Noncumulative Preferred Stock
Holders of cumulative shares have the right to collect previously omitted dividends, which makes the shares more attractive to investors. The table below compares cumulative stocks to their noncumulative counterparts:
|Cumulative Preferred Stock||Noncumulative Preferred Stock|
|Stockholders are entitled to previously unpaid dividends||Stockholders only have claim over the current period's dividends|
|Stockholders are incentivized with a minimum return guarantee||Stockholders do not have a guarantee of receiving dividends|
|Stockholders have the assurance of being paid before common shareholders||Stockholders have the assurance off being paid before common shareholders|
An additional caveat is that in the event of liquidation, cumulative stockholders are given preference over noncumulative stockholders. Noncumulative stockholders will get paid only after the cumulative stockholders have received their share.
Noncumulative Stocks vs. Common Stocks
Noncumulative stocks have an advantage over common stocks in that they are a type of preferred stock – shares that tend to be more expensive than common shares and have preference over common shares during dividend payouts. Although noncumulative stocks do not offer the same advantages as cumulative stocks, they still edge past common stocks in terms of investor preferences.
Advantages of Noncumulative Stock
For Corporations: Control over cash flow
Issuing noncumulative stock assists corporations in times of financial distress. By canceling the company’s obligation to pay unpaid dividends, noncumulative stock frees up cash flow and allows companies to utilize it when required.
For Investors: Relatively affordable
Although noncumulative stocks offer lower security, they tend to be priced at a lower rate than cumulative stocks, and still offer the advantages of preferred stock.
Company XYZ announces dividends of $3.50/share to be paid in 2017, 2018, and 2019. However, it fails to pay dividends in the first two years.
- Cumulative preferred stockholders will be owed $10.50/share ($3.50 + $3.50 + $3.50).
- Noncumulative preferred stockholders will be owed $3.50/share.
Company XYZ is being liquidated, and all its assets are being sold. The total value of assets is $1 billion after paying creditors, bondholders, employees, and the government.
The first payments from the rest of the $1 billion will go to cumulative preferred stockholders, followed by noncumulative preferred stockholders, and finally common stockholders, if any money is still left.
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