Hello, I am wondering what happens to the market price of a preferred stock if the issuer has withheld the dividend payments for a year or two? It would seem that the market price would decrease since the company cannot make payments. However, if the stock is cumulative, it would have multiple back-payments to pay the holder of the stock which could keep the price of the stock up…
Also, if an investor decides to sell cumulative shares after the company withheld dividends, would the back-payments be made to the new investor once dividend payments resume?
While there’s no mechanism in place that will automatically “force” the price of the preferred shares downward, it should be expected. Given market prices are driven by supply and demand, I can’t imagine a scenario where demand would outpace supply when a cash dividend payment is suspended. In fact, I’d fully expect a significant number of shares to be sold, especially by investors needing income.
I’d still expect the same for cumulative shares. While unpaid dividends accumulate as time passes, there’s still no guarantee dividend payments will ever begin again. If the dividends in arrears were to be paid, they would be issued to the current shareholder as of the record date. Stock doesn’t function like bonds do with accrued interest.