What is a 'Callable Preferred Stock'

A callable preferred stock is a type of preferred stock in which the issuer has the right to call in or redeem the stock at a preset price after a defined date. The terms of a callable preferred stock issue, such as the call price, the date after which it can be called, and the call premium (if any) are all defined in the prospectus at the time of issue and cannot be changed later. As with regular preferred shares, dividends on callable preferred shares must be paid by the issuer ahead of any dividends on its common shares.

!--break--Also known as redeemable preferred stock or callable preferred shares, callable preferred stock is a popular means of financing for large companies, since it combines elements of equity and debt financing. Many callable preferred shares trade on public stock markets.

Advantages for Issuers of Callable Preferred Stock

A callable preferred stock issue is advantageous to the issuer, since it confers the flexibility to lower the issuer's cost of capital if interest rates decline or if it can issue preferred stock later at a lower dividend rate. For example, a company that has issued callable preferred stock with a 7% dividend rate is quite likely to call the issue if it can issue new preferred shares carrying a 4% dividend rate. The proceeds from the new issue can be used to redeem the 7% shares, resulting in a direct savings of 3% for the company.

Conversely, if dividend rates on the market go up, the company will not call the shares and will continue to pay only 7%. The company is protected from rising financing costs and market fluctuations.

Advantages for Investors

The investor who holds callable preferred shares, on the other hand, has assured himself of a steady return. If the preferred issue is called by the issuer, the investor will most likely be faced with the prospect of reinvesting the proceeds at a lower dividend or interest rate. However, to compensate for this, issuers usually pay a call premium at redemption of the preferred issue which compensates the investor for part of this reinvestment risk. Investors assure themselves of a guaranteed rate of return if markets drop, but they give up some of the upswing potential of common shares in exchange for greater security.

Redeeming Preferred Shares in Practice

Callable preferred stock is routinely redeemed by corporations. This is done by sending a notice to shareholders detailing the date and conditions of the redemption. For example, on May 16, 2016, HSBC USA Inc. announced that it was redeeming its series F, G and H floating-rate non-cumulative preferred stock, effective June 30. This means that holders of the shares needed to return their shares on that day in exchange for payment of their capital, outstanding dividends and a premium, as the case may be.

BREAKING DOWN 'Callable Preferred Stock'

RELATED TERMS
  1. Callable Security

    A callable security is a security with an embedded call provision ...
  2. Preference Shares

    Preference shares are company stock with dividends that are paid ...
  3. Rate Trigger

    A rate trigger is a drop in interest rates significant enough ...
  4. Callable Bond

    A callable bond is a bond that can be redeemed by the issuer ...
  5. Call Premium

    Call premium is the dollar amount over the par value of a callable ...
  6. Preferred Stock ETF

    An exchange-traded fund that either tracks a preferred stock ...
Related Articles
  1. Investing

    Investing in Preferred Stock:The Basics

    Preferred stocks provide income as well as the potential to appreciate in value.
  2. Investing

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  3. Managing Wealth

    What You Need To Know About Preferred Stock

    Curious about preferred shares? Here's what you should know about these bond-like instruments.
  4. Managing Wealth

    An Example of Dividends in Arrears

    Learn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
  5. Investing

    Callable CDs: Check The Fine Print

    These offer higher returns than regular certificates of deposit, but there's a catch.
  6. Investing

    Bond Call Features: Don't Get Caught Off Guard

    Learn why early redemption occurs and how to avoid potential losses.
  7. Investing

    Preferred Stock ETFs With Huge Dividends

    If you prefer huge dividend yields, you might want to consider having a preferred stock ETF in your portfolio.
  8. Investing

    Income Funds 101

    Income funds don't have to be bonds, there are plenty to choose from. Read up on the types of income funds and whether they fit your investment needs.
  9. Investing

    Concerns About Preferred ETF May Be Overstated

    An active fund manager voiced concern about this preferred stock ETF, but it may be a case of much ado about nothing.
RELATED FAQS
  1. What are the different types of preference shares?

    Find out four types of preference shares – callable, cumulative, convertible and participatory - and how each benefits you ... Read Answer >>
  2. How does preferred stock differ from company issued bonds?

    Discover the primary differences between preferred stock and corporate bonds, two income-generating investment vehicles issued ... Read Answer >>
  3. What are some examples of preferred stock, and why do companies issue it?

    Understand the difference between preferred stock and common stock, and learn the primary reasons why companies issue preferred ... Read Answer >>
  4. Does issuing preferred shares offer a tax advantage for corporations?

    There is no direct tax advantage to the issuing of preferred shares when compared to other forms of financing such as common ... Read Answer >>
  5. What risk factors should investors consider before purchasing a callable bond?

    Understand the difference between callable and non-callable bonds and consider all the various risk factors associated with ... Read Answer >>
  6. What is the difference between preference and ordinary shares?

    Preferred shareholders have a higher priority claim to the assets of a corporation in case of insolvency than common shareholders. Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center