Purchasing Petrobras Preferred vs Common

From the Mailbag. I received this email on 12/28/2010. While PBR is up 15% since, the point is how sometimes a company's common vs preferred shares may have a discrepancy in price.

"Hey Scott,

What do you think about petrobras? They seem to have ordinary and preferred shares that you can buy. It is trading at about half of its all time high and up more than 2% today. I am interetsed in understanding ordinary vs preferred shares and why you would want to own one over the other. Another thing I like about this is ordinary shares are paying over a 4% div."

• The preferred/common stock can be tricky when looking at yahoo or google finance. They are not exactly right and it is worth to look at the companies 10-k. If you look at google finance it says that the company pays out .24 cents in dividend with a yield of 4.32% - this is wrong. ($.24 * 4)/36.68 = over 2%. Thus, .24 cents per quarter divided by the current price is over a 2% yield, not 4%. Google finance yield is incorrect. Looking at my brokerage account I got paid approx. $98 last year in div from PBR which divided by 100 shares is .98 cents - approx. the same as what google finance states. Meaning, the yield is actually the 2%.

• I'm not sure how much you know about preferred vs common, but her are some simple rules - sorry if I bore you. 1) Preferred gets dividends paid to them before common stock so if PBR cuts dividend then obviously shareholders don't get paid where PBR.A must pay dividend, 2) Preferred is higher on the latter in capital structure so if the company went into default the preferred holders are more senior and get paid out before the common holders, 3) Preferred stock holders do not have shareholder rights and do not get to vote as such 4) There is less liquidity with preferred stock (not a problem for minions like us).

• I remember back in 2008 people recommending preferred stocks because of their seniority and interest payments -If a preferred share dividend is missed, the dividends missed are accumulated and must be paid in full prior to any common dividends being paid. SO, if it says it will pay you a dividend it will - unless they go bankrupt and you get lucky enough where they liquidate and you still get some cash from the sale of assets.

• From my analysis, there is almost no difference in the dividend amount (PBR vs PBR.A), meaning I BELIEVE it is the same .24 cents whether you own common or preferred in this case. However, the div. yield will be different. Currently the pref. shares trail the common so you have a higher yield. That is the added benefit, you can control more shares with the same amount of capital thus getting paid a higher dividend - this is the key with preferred. You should expect not as much capital appreciation because of its higher yield - this is usually the catch with preferred but not always. Example, PBR was down YTD 23.07% while PBR.A (pref) was down 22.36%, over 10 years PBR was up 481% while PBR.A was up 378%. You can see the difference long term.

• My suggestion would be are your goals in 1) investment income or 2) capital gains? With 200 shares of PBR you get about 222 shares of PBR.A- so sbout $22 a more year in div. You're decision if you execute on Petrobras, but it may be worth the pref. because you can control more shares and the % returns have been similar. 5 yr returns between the two differ by only 1%.