Can Perpetuals Trade Perpetually?

I have recently been asked:

At what point will a company redeem its preferred shares, if the yield is high enough at some point the amount of interest they have paid out will be greater than the amount of capital generated from the sale of the preferred share. Is there a point where a preferred share just ceases to be traded, or does a company have to redeem them? My question is basically a pref can’t trade forever so how do you know when it will stop trading? I am assuming it may go on past the redemption date since the information you have provided says usually after 5-10 years.

… to which I respond:

It is true that at some point the amount the total amount of interest/dividend exceeds the original capital invested, but this is true of long term bonds as well. At five percent, money doubles in 15 years … so for a 5% 30-year bond, only one-quarter of the original value is represented by return of capital – three quarters of the value is the income stream. UK Perpetuals issued during the Great War are still trading.

As long as the company can invest the capital to achieve a rate of return higher than their payments, it’s a good deal for them.

There is no reason why a perpetual can’t trade forever. It will be called only when it makes sense for the company – which could be due to cheaper refinancing, simplification of the capital structure, take-over, bankruptcy, any number of things. Most perpetuals issued in the 90’s have been called, but only because refinancing was cheap.

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