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Noncumulative

A type of preferred stock for which dividends are not accumulated over time

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.

 

Noncumulative

 

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 StockNoncumulative Preferred Stock
Stockholders are entitled to previously unpaid dividendsStockholders only have claim over the current period's dividends
Stockholders are incentivized with a minimum return guaranteeStockholders do not have a guarantee of receiving dividends
Stockholders have the assurance of being paid before common shareholdersStockholders 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.

 

Practical Examples

 

Example 1

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.

In 2019:

  • Cumulative preferred stockholders will be owed $10.50/share ($3.50 + $3.50 + $3.50).
  • Noncumulative preferred stockholders will be owed $3.50/share.

 

Example 2

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.

 

Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Common vs Preferred Shares
  • Dividend Per Share
  • Cost of Preferred Stock
  • Shareholder Primacy

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