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What Are Non-Cumulative Shares

26 Sep 2023

Preference shares are an increasingly popular investment option among those looking for stability and the potential for dividend income in finance. Of all types of preference shares available, non-cumulative preference shares stand out for their unique qualities.

This post will explain non-cumulative preference shares and what makes them popular. 

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What Are Non-Cumulative Preference Shares?

Corporations issue non-cumulative preference shares as a form of capital raising. Unlike cumulative preference shares, which allow unpaid dividends to accrue and be distributed before common shareholders receive any payout, non-cumulative preference shares do not allow dividends to accumulate.

Hence, if an organization misses payments on non-cumulative preference shares in the future, shareholders do not have any claim over them.

How Do Non-Cumulative Preference Shares Operate?

Non-cumulative preference shares operate similarly to other forms of preference shares, but with several key distinctions:

1. Dividend Priority

Non-cumulative preference shareholders have an exclusive claim on dividends regarding non-cumulative preference shares and common shareholders. When companies declare dividends, non-cumulative preference shareholders receive their fixed dividend amount before other dividends are distributed to common shareholders.

2. No Dividend Accumulation

Non-cumulative preference shares are distinguished from cumulative preference shares by their lack of dividends accumulation, meaning if a company fails to pay out on these dividends when due, shareholders do not have any legal basis to claim those unpaid dividends in future periods; each period's dividends standalone without "carryover".

Advantages of Non-Cumulative Preference Shares 

Now that we understand what non-cumulative preference shares are, let's quickly go over some of their advantages for investors:

1. Higher Dividend Rate

Non-cumulative preference share investors enjoy a significantly higher dividend rate than equity shareholders and other categories of preference shares.

2. Priority On Payment

Non-cumulative preference shareholders will always take precedence over equity shares when it comes to the payment of dividends and claims during the liquidation proceedings of an issuing company.

Disadvantages of Non-Cumulative Preference Shares

1. Risk for Shareholders

Non-cumulative preference shareholders face more risk than those holding cumulative preference shares. Hence, if their dividend is missed, they cannot claim it in the future. Hence, this makes these shares less appealing to risk-averse investors.

2. Lower Dividend Stability

Investors looking for consistent dividend income may find non-cumulative preference shares less appealing. It is because of their inability to accumulate dividends. Therefore, it leads to unpredictable dividend payments.

Conclusion

Non-cumulative preference shares provide both investors and companies with advantages and disadvantages. They give companies greater financial flexibility while appealing to shareholders seeking higher dividend priority. 

However, non-cumulative preference shares increase risk and may not suit those prioritising dividends stability. Understanding non-cumulative preference shares is vital for making informed financial decisions.

 

Related Articles: What is Locational Arbitrage | What Is Latency Arbitrage | What Are Cumulative Shares

 

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