[Money Trends] Preferred Shares Cheaper Than Common Shares: Key Points to Consider Before Investing

This year, as the stock prices of large-cap stocks have risen significantly, the gap between common and preferred shares has widened. As a result, investor interest in undervalued preferred shares is growing. However, since there are differences depending on the type of preferred share, investors are advised to carefully review these factors before investing.

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According to the Korea Exchange on March 5, the gap ratio for Samsung Electronics preferred shares stood at 33.78% as of the closing price on March 3. This is an increase from 25.60% at the end of last year, and it is now much higher than the three-year average of 18.0%.

The gap ratios for Hyundai Motor’s three preferred shares have also widened. The gap ratio for Hyundai Motor 2PB has risen from 28.33% at the end of last year to 52.69%, Hyundai Motor PB from 30.52% to 52.61%, and Hyundai Motor 3PB from 30.86% to 54.96%.

The gap ratio for Mirae Asset Securities 2PB has also expanded, from 51.82% at the end of last year to 67.72%.

This year, as large-cap stock prices have remained strong, the gap between common shares and preferred shares has expanded. The preferred share gap ratio is calculated by dividing the price difference between common and preferred shares by the price of the common share. A larger gap ratio means that the preferred share is more undervalued compared to the common share. Interest in preferred shares tends to increase during the dividend season. In general, preferred shares do not have voting rights but receive higher dividends than common shares.

Kim Minkyu, a researcher at KB Securities, stated, "Recently, the rise in large-cap stocks has left many preferred shares overlooked compared to their common shares. It is worth paying attention to preferred shares that are undervalued compared to common shares, especially those with a higher gap ratio or a higher dividend yield." Song Seonjae, a researcher at Hana Securities, commented, "At this point, investments in preferred shares should take into account the possibility of a joint rise with common shares and a narrowing of the gap ratio."

However, it is important to note that not all shares with a ‘PB’ or ‘preferred’ designation are the same. Preferred shares are divided into old and new types. Old preferred shares, issued before the 1996 amendment to the Commercial Act, are typically traded under names such as ‘Company Name+PB’. If there is a ‘B’ at the end, it refers to new preferred shares issued after the 1996 amendment. For example, Hyundai Motor PB is an old preferred share, while Hyundai Motor 2PB and Hyundai Motor 3PB are new preferred shares. The number after the company name in Hyundai Motor 2PB and Hyundai Motor 3PB indicates the order of issuance.

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Old preferred shares typically pay an additional 1% dividend on par value, but do not offer any other additional rights or protections. While new issuances of old preferred shares are no longer possible, the previously issued shares are still in circulation.

In contrast, new preferred shares issued after the 1996 amendment to the Commercial Act often have structures such as participating dividends-guaranteeing a minimum dividend and providing additional payments in line with increases in common share dividends-or cumulative dividends, where unpaid dividends are paid out in subsequent periods.

Hyundai Motor is a prime example where the difference in rights between old and new preferred shares is clearly evident. Hyundai Motor PB is a typical old preferred share that, aside from the additional dividend compared to common shares, offers virtually no real rights such as dividend stability or voting rights. In contrast, Hyundai Motor 2PB and Hyundai Motor 3PB are new preferred shares with guaranteed minimum dividends and a participating dividend structure that offers additional dividends linked to increases in common share dividends.

Yoo Gunho, a researcher at Mirae Asset Securities, explained, "Hyundai Motor PB is a non-voting common share that carries similar business risks to common shares but lacks voting rights and dividend preference. As a result, it is structurally at a disadvantage and trades at a significant discount compared to common shares." He further analyzed, "This structural discount arises from bearing the same risks without protective measures, and if such protections are added, the share would be expected to track the common share more closely-a so-called 'true gap.' It is important to distinguish the structural differences between old and new preferred shares and consider scenarios for generating alpha."

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