Show BUSINESS and the tho STOCK MARKET by b BABSON'S REPORTS INC Copyright 1971 1973 PREFERRED STOCKS AS AN INVESTMENT Despite the fact that it is more costly for corporations to issue preferred stocks than bonds preferred dividends are arc paid out of tax after-tax earnings while bond interest is tax deductible for the issuing corporation a record volume of new preferred stock was issued in April of this year In fact the April level was nearly five times the monthly average of 1970 and more than ten times the average monthly volume of the two pre pro ceding years The main causes of this rather sudden sudden sud den emphasis on as a means of raising corporate cash include the overburdened bond market the desire of many corporations to keep their debt debt- equity ratios in balance and the opinion of some company treasurers that their common stock is priced too low for com corn man mon stock financing Unique Investment Medicine Preferred stocks legally represent part ownership of a company and arc are classified class in the equity section of the balance sheet They are however very different from common stocks Generally speaking speaking speaking speak speak- ing holders of preferred stocks have the right to receive a specified dividend before before be fore any payments are arc made on the com com- mon mono On the other hand unless the issue is issue is is- sue is designated participating the preferred holders holdel's do not shire share in the company's profits beyond the stipulated dividend Versus Bonds Many 1 investors view straight prefer reds those not convertible into common stocks as a fixed investment somewhat akin to bonds True both sell on a yield basis and their prices fluctuate inversely to general interest rates When rates decline de cline etine the market price of both straight preferred stocks and bonds bands rises and vice versa This viewpoint however tends to obscure obscure ob some basic differences between the two Primarily do not constitute a legal debt on the issuing corporation Thus the dividends on a preferred pre ferret stock must be declared by the corporate directors and can ran be omitted at their discretion Also preferred stocks do not have any maturity dates as do most bonds and holders of these issues have no claim against the corporation regarding their principal except that they rank ahead of the common stockholders stockholders stock stock- holders on receiving ing their share of principal prin cipal in case there should be a liquidation liquid atlon Hence from a legal standpoint preferred stockholders have a considerably consider ably less advantageous position than do bondholders as an Investment Preferred stocks storks can be an especially attractive Investment in for a corporation because of the favorable tax status of dividends 85 of most dividends excluding some utilities utilities received received by corporations are arc exempt from federal income tax But nut this advantage does not apply to individual owners who vho can exclude only the usual of dividends from taxable income There are are however other good fea tea tures an individual should recognize when considering investment in preferred stocks storks usually pay a quarterly quarter quarter- ly dividend whereas interest on bonds is generally paid semiannually Also preferred pre frred stocks except for thin Issues are often easier to buy and sell in small amounts than are bonds although the commissions are higher on there are various special features and on certain pre fern ls that can make them more attractive at than others In general each earh investor should con sider preferred stocks within the frame work of his own position objectives and financial means For the investor wishing wish ing to add a preferred Issue the Re search Staff of Babson's Reports recommends mends Aluminum Company of America v cum preferred which is appropriate ate for both individual and corporate investment in in- vestment or and-or Pacific Gas Electric 6 G per cent cum 1st preferred not no of appropriate appropriate appropriate ap ap- for corporate investment |