Noncumulative Preferred Stock: Definition & Key Differences

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.

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 StockStockholders are entitled to previously unpaid dividendsStockholders only have claim over the current period's dividendsStockholders are incentivized with a minimum return guaranteeStockholders do not have a guarantee of receiving dividendsStockholders 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 liquidationLiquidation ValueLiquidation value is an estimation of the final value which will be received by the holder of financial instruments when an asset is sold or liquidated., 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 Commercial Banking & Credit Analyst (CBCA)™Program Page - CBCAGet CFI's CBCA™ certification and become a Commercial Banking & Credit Analyst. Enroll and advance your career with our certification programs and courses. 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 SharesCommon vs Preferred SharesPotential investors who are looking to acquire a stake or ownership in a company can choose to purchase between common vs preferred shares. Companies
• Dividend Per ShareDividend Per Share (DPS)Dividend Per Share (DPS) is the total amount of dividends attributed to each individual share outstanding of a company. Calculating the dividend per share
• Cost of Preferred StockCost of Preferred StockThe cost of preferred stock to a company is effectively the price it pays in return for the income it gets from issuing and selling the stock. They calculate the cost of preferred stock by dividing the annual preferred dividend by the market price per share.
• Shareholder PrimacyShareholder PrimacyShareholder primacy is a shareholder-centric form of corporate governance that focuses on maximizing the value of shareholders before considering