What is Preferred Shares?
Preferred shares are a class of equity instrument that grants holders a fixed or cumulative dividend and priority over ordinary shareholders in dividend distributions and liquidation proceeds, but typically without voting rights.
How It Works
- Cumulative: unpaid dividends accumulate and must be paid before any ordinary dividend.
- Non-cumulative: missed dividends are forgone.
- Convertible: can be exchanged for ordinary shares at a set ratio.
- Redeemable: company can buy back at a set price; under IAS 32 these are classified as liabilities.
Saudi Context
The Saudi Companies Law and CMA rules permit Saudi joint-stock companies to issue preferred shares, though they remain less common than ordinary shares on Tadawul. Mandatorily redeemable preferred shares are classified as financial liabilities under IFRS and their fixed dividends are recognized as interest expense rather than dividends.
Example
A Saudi company issues 100,000 cumulative preferred shares at SAR 100 with a 6% annual dividend. Annual preferred dividend = 100,000 × SAR 100 × 6% = SAR 600,000, payable before any ordinary dividend.