Definition
Quarterly Income Preferred Securities (QUIPS) are a type of preferred stock issued by a corporation to raise capital, typically by financial institutions. They offer a fixed, quarterly dividend to investors, but the issuing company reserves the right to defer these payments for up to 5 years. Because they’re typically long-term securities, QUIPS have high yields but also carry more risk for investors.
Phonetic
The phonetic pronunciation of “Quarterly Income Preferred Securities (QUIPS)” is “Kwawr-tur-lee Ink-uhm Pree-furred Si-kyoor-i-teez (KWIPS)”.
Key Takeaways
- Dividend Payouts: Among the key features of Quarterly Income Preferred Securities (QUIPS) is the scheduled distribution of dividends on a quarterly basis. This regular income distribution makes QUIPS an attractive investment for income-oriented investors.
- Hybrid Security: QUIPS are hybrid securities possessing characteristics of both corporate bonds and preferred stocks. Like bonds, QUIPS distribute fixed income, and similar to preferred stocks, they have a par value and dividend rate. This hybrid nature offers unique opportunities for diversification.
- Capital Structure Position: In the event of liquidation, QUIPS are situated between common stocks and traditional preferred stocks within the capital structure. This means that QUIPS stakeholders have a higher claim on the company’s assets and earnings than common shareholders, but lower than the traditional preferred stockholders and bondholders.
Importance
The business/finance term, Quarterly Income Preferred Securities (QUIPS), holds significant importance as they signify a type of preferred stock issued by a corporation, which pays dividends to its holder on a quarterly basis. These securities are essential for investors who prioritize stable and regular income, as they provide predictable dividends at fixed intervals, irrespective of the company’s economic or financial condition. Companies also benefit from QUIPS as they are typically considered debt – which makes the interest payments on QUIPS tax-deductible, offering a cost-effective method of raising capital. Therefore, understanding the functioning and importance of QUIPS can greatly enhance an investor’s portfolio strategy, and also provide beneficial financial planning for corporations.
Explanation
Quarterly Income Preferred Securities (QUIPS) are one of the financial tools used to generate consistent quarterly income for investors. Similar to preferred stock, QUIPS are typically issued by subsidiaries of large organizations rather than the parent company. The primary purpose of issuing these securities lies in offering an attractive dividend yield to investors. By paying regular dividends on a quarterly basis, QUIPS can provide a steady income stream. This feature endears them to income-focused investors, such as retirees, who need a consistent income flow to cover their living expenses.
Another core use of QUIPS is to enhance the borrowing firm’s financial leverage without impacting their credit rating. Since QUIPS are issued by a company’s subsidiary but are treated as debt, the interest expenses become tax-deductible for the parent company. This allows the company to reduce its overall tax burden. Furthermore, QUIPS don’t influence the firm’s credit rating since the securities are technically classified as equity, despite functioning more like debt. This allows businesses to raise capital without the potential for a negative impact on their creditworthiness.
Examples
1. Bank of America: In 1996, Bank of America issued $345 million worth of Quarterly Income Preferred Securities (QUIPS). These securities qualified as Tier 1 capital for the bank, a category of capital adequacy that is the highest quality type of capital a bank has to support its risks. The QUIPS issued by Bank of America had a dividend rate of 7.20%.
2. JP Morgan Chase & Co.: Another example of QUIPS used in the real world is by JP Morgan Chase. In 1993, the company issued QUIPS worth $200 million. These securities had a fixed dividend payout for investors and were part of the company’s capital management strategy.
3. Wells Fargo & Company: This company issued QUIPS as a method of finance and capital management. In 1995, Wells Fargo issued 8 million shares of QUIPS which had a fixed dividend of around 7.50%. The QUIPS were offered as a way to boost the bank’s capital ratios while reducing the exposure of the company to interest rate risk. Please note, QUIPS are quite rare and while these are examples of such securities being issued in the past, the information might not always be readily available or easily accessible given their rarity and complexity.
Frequently Asked Questions(FAQ)
What are Quarterly Income Preferred Securities (QUIPS)?
Quarterly Income Preferred Securities, often referred to as QUIPS, are an investment vehicle that includes features of both corporate bonds and preferred stocks. The issuer pays dividends to investors on a quarterly basis, largely from pre-tax income.
Who are typically the issuers of QUIPS?
Most often, QUIPS are issued by financial institutions such as banks and insurance companies, the energy sector, and other companies with significant taxable income.
Why would an investor choose QUIPS over other forms of investment?
QUIPS are attractive to investors because they offer a dependable, regular income in the form of quarterly dividends. They also have seniority over common and preferred stocks in the event of bankruptcy, providing a level of risk protection.
Are dividends from QUIPS taxable?
Yes, the dividends gained from QUIPS are generally taxable. However, because these dividends are paid from pre-tax profits, they may carry certain tax advantages for the issuer.
How risky are QUIPS as an investment?
While QUIPS are generally considered a safer investment compared to common stocks, they do carry a level of risk given that dividend payments depend on the issuer’s profitability. If a company is not performing well, it may not be able to make these payments.
Can one sell QUIPS?
Yes, QUIPS are transferable and can be sold or bought in the secondary market like common stocks and bonds. However, their market is less liquid compared to other securities, which could impact the ease of selling or the price received.
How are QUIPS different from traditional preferred stocks?
The key difference lies in the tax treatment for the issuers and the fact that QUIPS pay dividends to investors from pre-tax income. Also, dividends from QUIPS are deductible for issuers, unlike traditional preferred stocks.
Can dividends from QUIPS be omitted?
Yes, but typically only if the company is in financial distress. Omission of dividends can affect a company’s credit rating and ability to raise further capital. Additionally, some QUIPS have specific clauses that protect the investor’s interests, such as the inability to pay dividends on common stocks until QUIPS dividends are paid.
Related Finance Terms
- Dividend Payment: This term refers to the portion of profits which a corporation distributes to its shareholders, typically on a regular basis. For QUIPS, dividends are usually paid quarterly.
- Fixed Income Securities: QUIPS are a type of these securities that pay a fixed return on your investment, typically in the form of interest or dividends.
- Maturity Date: This is the date on which the principal amount of QUIPS is scheduled to be repaid to the holder of the security.
- Preference Shares: Refers to a type of share that entitles the holder to a fixed dividend. QUIPS are a form of preference shares.
- Redemption Feature: This term refers to a feature of some investment securities, including QUIPS, which allows the issuer to buy back the securities from the investors.
