Call Provision

A preferred stock issued with a call provision gives the issuing company the right to re-buy the stock at will to outstanding preferred stockholders. The call price is generally more than the preferred stock’s par value.

The call provision is advantageous to the issuing company and not for the holder of the preferred stock.

When interest rates in the markets drop significantly below the dividends rate of the preferred issued, the companies tend more to execute the call provision by means of retiring such issue and replace it with new issues of preferred stocks with lower dividend rates.

Citigroup redeemed for cash all the outstanding shares of its 8.4 cumulative preferred stock series K at a redemption price of $25 per share plus accrued dividends in October 2001. In January 2003, Citigroup called in its adjustable rate cumulative preferred stock series Q and series R  for a cash price of $25 per share plus accrued dividends.

When a preferred issue is called, the savings to the issuing company represent a loss of income to the preferred stockholders. Thus not only do preferred stockholders suffer a loss of income when their high-dividend-rate preferred stock issues are called in, but the call provision also acts as ceiling limit on the price appreciation of the preferred stock.

When the rates of interests decline, prices of high-dividend-rate preferred stock issues boost, but prices of preferred stocks will not go up more than the call price. For example, if an issue of preferred stock has a call price of $55 potential buyers of preferred stocks will not pay more than said amount when rates of interests decline significantly. This is like this because if investors had to pay more than the top price they would lose money if the issue is called.

To achieve that investors buy preferred stocks issues during high-interest-rate periods, the company include a call protection feature.

This prevents the company from calling the issue for a period of time, generally for five years, but this varies. After the call protection period, the issue is callable at the stated call price per share.