What is Cumulative Dividends?
Cumulative dividends are dividends on cumulative preferred shares that accumulate if the company skips or partially pays them in a given period. The unpaid amount, called dividends in arrears, must be paid in full before any dividend can be paid to common shareholders. Cumulative dividends reduce the risk preferred shareholders bear and typically command a lower stated rate than non-cumulative alternatives.
How It Works
- Issue cumulative preferred shares with a stated dividend rate.
- If a dividend is skipped, record the arrears (disclosure, not liability, unless declared).
- Pay all arrears plus current preferred dividend before any common dividend.
- Arrears are disclosed in the notes but not recognized as liability until declared.
- Cumulative status protects preferred holders during downturns.
Saudi Context
Cumulative preferred shares are permitted under the Saudi Companies Law but are less commonly issued than in some other markets. Saudi banks may issue Tier 1 capital instruments (sukuk-like) with non-cumulative features per Basel III requirements. CMA regulates the terms and disclosure of any cumulative dividend feature on Tadawul-listed instruments.
Example
A company has 1 million cumulative preferred shares with an annual SAR 4 dividend. It skips the dividend for two years. Dividends in arrears = 1,000,000 * 4 * 2 = SAR 8 million. Before resuming common dividends, the company must pay SAR 8m arrears plus the current year’s SAR 4m preferred dividend, for a total of SAR 12m to preferred holders.