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.

BREAKING DOWN 'Callable Preferred Stock'

Callable preferred stock, also known as redeemable preferred stock or callable preferred shares, 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.

RELATED TERMS
  1. Callable Common Stock

    Callable common stock is a share of ownership in a business, ...
  2. Preferred Stock

    Preferred stock refers to a class of ownership that has a higher ...
  3. American Callable Bond

    An American Callable Bond can be redeemed by the issuer at any ...
  4. Call Risk

    Call risk is the risk faced by a holder of a callable bond that ...
  5. Taxable Preferred Securities

    Taxable preferred securities are a preferred equity security.
  6. Convertible Preferred Stock

    Convertible preferred stock includes an option for the holder ...
Related Articles
  1. Investing

    Understanding Preferred Stocks

    Companies choose preferred stock for many reasons some being the flexibility of payments and easier to market. Learn the pros and cons of preferred stocks.
  2. Investing

    Callable CDs: Read the Fine Print Before Investing

    Learn about callable certificates of deposit (CDs) and how they offer higher yield returns than regular certificates of deposit, but with a catch.
  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. Investing

    Here's What Happens When a Bond Is Called

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

    Why Companies Issue Bonds

    When companies need to raise money, issuing bonds is one way to do it. A bond functions as a loan between an investor and a corporation.
  6. Investing

    The Right Way to Preferred Stocks Right Now

    Preferred stocks can be vulnerable to rising interest rates, but this ETF can help solve that problem.
  7. Investing

    Introduction to Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  8. Insights

    Why Warren Buffett Prefers Preferred Stock (GS, BAC)

    Warren Buffett recently made a tidy profit his investment in Kraft Heinz's preferred stock. He's pulled this off before, with Goldman Sachs and Bank of America. What makes this kind of stock ...
  9. Financial Advisor

    4 Reasons a Company Might Suspend Its Dividend

    Learn about the four most common reasons a company may choose to suspends its dividends, including financial trouble, funding growth and unexpected expenses.
RELATED FAQS
  1. Why would a company issue preference shares instead of common shares?

    Learn about some reasons that corporations might issue preference or preferred shares, and why investors might value them ... Read Answer >>
  2. What are the advantages and disadvantages of preference shares?

    Learn about the advantages and disadvantages of preference shares for both investors and issuing companies. Read Answer >>
  3. 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 >>
Trading Center