US Airways had indefinitely deferred the quarterly dividend on its $358 million of cumulative convertible 91.25% preferred stock. According to a US Airways spokesperson, the company did not want to 'continue to pay a dividend while the company is losing money.' Others interpreted the action as 'an indication of a cash crisis situation.'
At the time, Bershire Hathaway, the large company run by Warren Buffett and the owner of the preferred stock, was not happy. However, US Airways was able to turn around, become profitable, and return to paying its cumulative dividends on preferred stock. Berkshire Hathaway was able to convert the preferred stock into 9.24 million common shares of US Airways common stock at $38.74 share at a time when the market value has risen to $62.
What is cumulative convertible preferred stock? Why is deferring dividends on those shares a drastic action? What is the impact on profitability and liquidity? Why did using preferred stock instead of long-term bonds as a financing method probably save the company from bankruptcy? What was Berkshire Hathaway's gain on its investment at the time of the conversion?