Establishing the Total Dividends per Share Accumulated
Most, yet not all, preferred shares include a "cumulative" feature. This implies that if any dividend payments have been missed, they must be paid out to preferred shareholders before common shareholders receive any current dividends. The purpose of cumulative dividend provisions is to ensure preferred shareholders receive the promised return on their investments.
This scenario can occur when a company decides to halt dividend payments during tough financial circumstances, like several companies did during the 2008 financial crisis.
As a recent example, Goodrich Petroleum Corporation halted dividend payments on three different series of its preferred stock in August 2015 and made it known in a press release that the unpaid dividends would accumulate. In case a similar situation arises with the preferred stocks you own, here's how to calculate the cumulative dividends owed to you.
Step-by-step calculation
Calculating cumulative dividends per share
First, identify the preferred stock's annual dividend payment by multiplying the dividend rate by its par value. You can find this information in the company's preferred stock prospectus, and the par value is typically $25 or $50 per share; however, there are exceptions.
Next, divide the annual dividend by four to calculate the preferred stock's quarterly dividend payment.
Finally, multiply the number of missed dividend payments by the quarterly dividend amount to calculate the cumulative preferred dividends per share you're owed.
It is also noteworthy to mention that some, but not all, cumulative preferred stocks contain additional provisions to compensate shareholders if preferred dividends are suspended. For example, some preferred stocks require accumulated dividends to be repaid with interest. In Goodrich Petroleum's case, if dividends remain unpaid for six quarters, preferred shareholders are entitled to two seats on the company's board. One series also increases its dividend rate by 1% each year until all accumulated and unpaid dividends are paid in full.
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Example
An example
To illustrate this, let's say that you own the preferred stock of a company that has faced financial difficulties and has been forced to halt its dividend payments for the past three quarters. If your preferred shares pay a 6% dividend rate and have a par value of $25, you can determine the cumulative dividends using the three steps discussed above.
Note: Make sure to convert the percentage to a decimal before making calculations. To do this, simply divide the percentage by 100.
Once the company resumes paying dividends, it must pay $1.125 per share to preferred shareholders before making any dividend payments to common shareholders.
In tough financial situations like the 2008 financial crisis, some companies may choose to halt dividend payments, as Goodrich Petroleum Corporation did with three series of its preferred stock in August 2015. During such instances, the unpaid dividends accumulate, which can significantly impact an investor's overall return.
When calculating cumulative dividends owed to preferred stockholders, investors should identify the annual dividend payment by multiplying the dividend rate by the par value, as demonstrated in the Goodrich Petroleum Corporation example.
