Investors warned to be wary of volatile preferred stocks ahead of delisting

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Some preferred stocks listed on South Korea’s main Kospi market are set to be delisted next month due to the insufficient number of outstanding shares. The stocks are subject to high price volatility due to the small number of shares in circulation and investors should be cautious as they are priced higher than common stocks and do not offer attractive dividends, experts say.

Hyundai BNG Steel Co., SK networks Co., Samsung Heavy Industries Co., Heungkuk Fire & Marine Insurance Co., and DB HiTek Co. urged investors last week to pay attention, saying that their preferred stocks could be delisted due to the non-fulfillment of listing conditions, according to the Korea Exchange on Monday.

The number of their listed preferred stocks remained below 200,000 for two consecutive semi-annual periods. If the number does not increase to more than 200,000 by the end of June, these stocks will enter a delisting process on July 3.

The preferred shares have been experiencing significant price volatility.

For example, SK networks’ preferred shares hit the daily upper limit on June 21 for no apparent reason, then dropped 7 percent on June 22 and 10 percent on June 23.

Samsung Heavy Industries shares fell 7 percent for two consecutive days after the stock price rose 14 percent on June 20. Hyundai BNG Steel saw its preferred stock rise 19 percent on June 21 before falling 10 percent on the following day and 8 percent on June 23.

As preferred stock does not have the voting rights of common stock, it typically has a lower share price and higher dividend payments than common stock.

However, these preferred stocks do not meet these conditions. The five preferred stocks at risk of delisting next month are priced higher than common stocks, except for DB HiTek.

Dividends are also not attractive for preferred stocks. SK networks’ preferred stock paid an annual dividend of 145 won ($0.11) per share until last year, which is higher than 120 won of the common stock, but the market dividend yield is zero percent, which is significantly lower than the common stock yield, which is around 2 to 3 percent.

Samsung Heavy Industries’ preferred stock, like its common stock, has not paid a dividend for nine years.

Companies with an insufficient number of listed shares can stay listed by increasing the number of shares through a stock split or a capital increase, but this also affects common shares.

In the case of a capital increase, the company needs investors to accept the newly issued shares. However, these preferred shares are likely to be overpriced compared to the value of the common stock and will not succeed in any capital increase.

Companies that fail to meet the minimum number of shares will have a three-to-five-day notice period for delisting in July. During this period, trading is suspended. This is followed by a liquidation sale on the 6th-14th of the same month. The delisting will take place on July 15.