CNBCâs Charlie Gasparino tells the desk that Bank of America is going to repay $45 billion and get out of the TARP program. And they will raise capital over the next few days, he adds. That suggests to host Melissa Lee that there will be an offering - although Karen Finerman says she would be surprised if it's entirely done with common equity. Later in the broadcast Gasparino says Bank of America will use $26.2 billion in available cash and will also sell $18.8 billion in preferred stock - with the offering coming on Monday. http://www.cnbc.com/id/34244982/
What's the difference between raising capital with common equity, as opposed to with preferred equity? Obviously in one case they're selling common shares, and in the other they sell preferred. But common shareholders will be diluted equally either way, right?
First, preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors. In these instances when distributions are made, preferred stockholders must be paid before common stockholders. However, this claim is most important during times of insolvency when common stockholders are last in line for the company's assets. This means that when the company must liquidate and pay all creditors and bondholders, common stockholders will not receive any money until after the preferred shareholders are paid out. Second, the dividends of preferred stocks are different from and generally greater than those of common stock. When you buy a preferred stock, you will have an idea of when to expect a dividend because they are paid at regular intervals. This is not necessarily the case for common stock, as the company's board of directors will decide whether or not to pay out a dividend. Because of this characteristic, preferred stock typically don't fluctuate as often as a company's common stock and can sometimes be classified as a fixed-income security. Adding to this fixed-income personality is the fact that the dividends are typically guaranteed, meaning that if the company does miss one, it will be required to pay it before any future dividends are paid on either stock. Common stock ownership has the additional benefit of enabling its holders to vote on company issues and in the elections of the organization's leadership team. Usually, one share of common stock equates to one vote.