Security Analysis by Benjamin Graham and David Dodd was first published in 1934. It is a fundamental book for serious students of value investing.
In this chapter, Mr. Graham and Mr. Dodd discuss the investment merits of Preferred stocks as a fixed value investment.
Per the terms of the security, and its position in the capital structure, the authors think a typical preferred is not worthy of a straight investment for income purposes. That is because preferred stocks don't have fixed claims of bonds and lack the appreciation potential of stocks. Preferred stock dividends could be suspended by directors much easier than bonds where the company will default if it doesn't pay the bond's coupon. The authors demonstrate the price performance of preferred stocks to depict their point.
Mr. Graham and Mr. Dodd think there are very rare cases where preferred stocks could be considered an investment. Even in those cases, there is no common benefit for the investor and company. The company doesn't get the tax benefit and lower cost of financing. And, the investor doesn't have the surety of the income.
The authors go to mention that the selection criterion for preferred stocks should be stringent versus bonds (Chapters 8 to 11).
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