Zen asked in Business & FinanceInvesting · 1 decade ago

Is stocks that pay dividend to preferred stockholder more than what it earns still worth buying?

Let say you come across a stocks that is growing about 25% in net sales for the last 3 years. Earning an average of 8 millions in the past 3 years. But you notice that for it's recent quarter ending in Dec 2007, it pays out nearly 12x more than it's quarterly income. Do you still consider this stock worth buying?

I have no financial or investment background. This is what I personally think : "Since a preferred stocks give the right to stockholders to receive dividend, then this company stated above will need to dig their pocket to pay those stockholders annually. But if you look at their past 3 years earning history, there is no way for you to hope to get a piece of this earning, because what they pay to preferred stockholder is beyond their net income. At the end, a negative amount of cash is available to common stockholders".

Will this stocks still worth buying?

Thanks and have a nice day ;)

Cheers

2 Answers

Relevance
  • Favorite Answer

    It is very rare for a stock to pay out more than it makes unless the dividend is part of the corporate officers compensation. If the corporate officers are the preferred shareholders and the company is in bad times then this may not be as bad of a situation as it looks. If this is the case and you feel the company is on the brink of something good then you may want to buy in to it. Now if the company is doing well and is paying out more than they are making to preferred shareholders then stay away and report it to the SEC because they are diluting the wealth of the company to a select few at the expense of other which is illegal.

  • Anonymous
    1 decade ago

    The answer might be yes. The preferred dividend is fixed. It does not grow. It may be that there is a temporary downturn in earnings which will rebound. Is the preferred stock callable any time soon? Does the company have any debt. Perhaps the preferred can be converted to debt.

    Most importantly, look at the cash flow. Does that more than cover the preferred dividend? Occasionally, a company will have very large depreciation.

    You mentioned that sales are growing 25% annually. Are earnings? That is very important too. If sales and earnings are growing at 25% and if the pe is low enough, it might very well be a buy. Especially if the preferred is callable and the company does not have any debt.

Still have questions? Get your answers by asking now.