Convertible Preferred Stock

Convertible Preferred Stock is a hybrid security that pays a fixed dividend but can be converted into a specific number of common shares at a predetermined price.

📝 Buffett's Strategic Use

Buffett utilized convertible preferred stock in several key transactions during the 1970s, most notably in the GEICO rescue:

• Risk Protection: As a preferred security, it ranks higher than common stock in the event of liquidation, providing a degree of downside protection.
• Fixed Income: It provides a steady dividend yield (often higher than the common stock dividend).
• Upside Potential: The conversion feature allows Berkshire to participate in the "equity upside" if the company turns around and its common stock price rises significantly.
• Application (GEICO 1976): Berkshire invested $19.4 million in GEICO's convertible preferred stock, allowing it to capture the recovery value of the company while maintaining more security than common stockholders during the distress period.

🔗 Connections

• Company: GEICO
• Source: 1976 Letter, 1977 Letter