For non-cumulative preference shares or stock, the agreements between the shareholders and the company differ from cumulative preferred stocks. Although, both are part of private equity and fixed-income investments.
Definition of Noncumulative preference shares
It can be defined as a type of preference shares where the holder’s dividends will be suspended indefinitely if the company cannot pay such dividends in the current year.
A type of preference shares. There are majorly eight types of preference shares and noncumulative is one of them. Three types have already been discussed in previous articles.
No cumulative dividends. Holders of these preferred stocks cannot receive dividend the following year if the company’s board of directors decided not to declare dividends in the present year. This means that the dividends are lost and gone forever.
Noncumulative preference shares favour the company more than other shares. Because in an event where the company cannot pay a particular period’s dividend, there will be cash outflow from the company with regards to that period.
Illustration of Noncumulative Preferred Stock
For example, Dango Limited was unable to pay dividends of 50 million Naira to its noncumulative preference shareholders with respect to the fact that no profit was made in the year 2018. However, in the year 2019, the company made profits and the board of directors have declared dividends. The 2018 dividends will not be paid. Only the 2019 dividends will be paid to these preference shares.
Despite the disadvantage, when it comes to other matters like payment of a dividend or the winding up of the company, noncumulative preference shares as well as other preferred stocks have senior rights over ordinary shares.
In the case of dividends, they are paid first before ordinary shares. And in the case of liquidation, they receive the value of their investments before ordinary shares.
Non-cumulative preference shares received noncumulative dividends. Also, they have the same right with other preferred shares.