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Non-Callable Preferred Stock

A type of preferred stock that cannot be bought back by the issuer

What is a Non-Callable Preferred Stock?

A non-callable preferred stock (also known as non-redeemable preferred stock) is a type of preferred shares that do not include the callable feature. In other words, the issuer of non-callable preferred shares does not have the option to buy back the issued preferred shares (call) at some predetermined price after a certain date. In this sense, non-callable preferred shares are similar to non-callable bonds.

 

Non-Callable Preferred Stock

 

Understanding Non-Callable Preferred Stock

Despite the lack of callable provision, non-callable preferred shares have other features typical for this type of financial securities, including preference of dividends, preference in assets claim in case of the company’s liquidation, and non-voting clauses.

Non-callable preferred 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). In such a case, the investors will not have a chance to find other investment opportunities with a similar dividend rate as the newly issued shares will have a lower rate.

Generally, even preferred shares with a callable feature have a non-callable period. Strictly speaking, callable preferred shares become redeemable only after a predetermined date (when the non-callable period expires).

Preferred shares with a non-callable provision also have a non-convertible provision. It means that the preferred shares cannot be exchanged for the company’s common shares in the future.

 

Valuation of Non-Callable Preferred Shares

The valuation of non-callable preferred shares is simpler relative to 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

 

Where:

  • P – the price of a non-callable preferred 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 the dividends in perpetuity.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Callable Bond
  • Ex-Dividend Date
  • Held to Maturity Securities
  • Stockholders Equity

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