Non-Callable Preferred Stock: A Comprehensive Guide

Non-callable preferred stock (also known as non-redeemable preferred stock) is a type of preferred stock shares that do not include a callable feature. In other words, the issuer of non-callable preferred shares does not have the option to buy back the issued shares (callCall OptionA call option, commonly referred to as a "call," is a form of a derivatives contract that gives the call option buyer the right, but not the obligation, to buy a stock or other financial instrument at a specific price - the strike price of the option - within a specified time frame.) at some predetermined price after a certain date. In this sense, non-callable preferred shares are similar to non-callable bonds.

Understanding Non-Callable Preferred Stock

Despite the lack of a callable provision, non-callable preferred stock shares have other features typical of preferred stock, including preference of dividendsDividendA dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend., preference in assets claim in case of the company’s liquidation, and non-voting clauses.

Non-callable preferred stock 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 ratesInterest RateAn interest rate refers to the amount charged by a lender to a borrower for any form of debt given, generally expressed as a percentage of the principal. fall). This is a plus for the issuer but a risk for the shareholders.

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

Preferred shares with a non-callable provision also typically have a non-convertible provision. This means that the preferred shares cannot be exchanged for the company’s common sharesCommon StockCommon stock is a type of security that represents ownership of equity in a company. There are other terms – such as common share, ordinary share, or voting share – that are equivalent to common stock. in the future.

Valuation of Non-Callable Preferred Stock

The valuation of non-callable preferred stock is relatively more simple than 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 stock 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 dividends in perpetuity.

Additional Resources

We hope you’ve enjoyed reading CFI’s explanation of non-callable preferred stock. CFI offers the Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! 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 BondCallable BondA callable bond (redeemable bond) is a type of bond that provides the issuer of the bond with the right, but not the obligation, to redeem the bond before its maturity date. The callable bond is a bond with an embedded call option. These bonds generally come with certain restrictions on the call option.
• Ex-Dividend DateEx-Dividend DateThe ex-dividend date is an investment term that determines which stockholders are eligible to receive declared dividends. When a company announces a dividend, the board of directors set a record date when only shareholders recorded on the company’s books as of that date are entitled to receive the dividends.
• Held to Maturity SecuritiesHeld to Maturity SecuritiesHeld to maturity securities are securities that companies purchase and intend to hold until they mature. They are unlike trading securities or available for sale securities
• Stockholders EquityStockholders EquityStockholders Equity (also known as Shareholders Equity) is an account on a company's balance sheet that consists of share capital plus