The issuance of preferred stocks by Strategy (MicroStrategy, ticker MSTR) is generally considered **non-dilutive** to common shareholders in terms of voting control and ownership percentage, but there are nuances to consider. Here's a detailed explanation:
### Why Preferred Stock Issuance is Typically Non-Dilutive:
1. **No Voting Rights**: Preferred stocks, such as Strategy's STRK, STRF, and STRD offerings, typically do not carry voting rights, unlike common stock. This means issuing preferred shares does not dilute the voting power of existing common shareholders.
2. **Equity Financing Without Diluting Ownership**: Preferred stock allows companies like Strategy to raise capital without issuing additional common shares, which would reduce the ownership percentage of existing common shareholders. Strategy has used preferred stock offerings (e.g., STRF and STRK) to fund bitcoin purchases without diluting common shareholders' equity stakes.
3. **Hybrid Nature**: Preferred stock is a hybrid security with characteristics of both equity and debt. It provides a fixed dividend, which gives the company flexibility (e.g., dividends can be deferred without default risk, unlike debt). This structure avoids immediate dilution of common stock while providing capital.
4. **Anti-Dilution Provisions**: Preferred stocks often come with anti-dilution protections, particularly for investors. For instance, Strategy’s STRK includes a conversion feature allowing holders to convert preferred shares into common stock at a specific ratio if certain conditions are met (e.g., common share price reaching $1,000). However, this conversion is not automatic and only occurs under specific circumstances, meaning the issuance itself does not immediately dilute common shares.
### Nuances and Potential Dilution Risks:
While preferred stock issuance is generally non-dilutive, there are scenarios where it could indirectly or eventually lead to dilution:
1. **Convertible Preferred Stock**: If preferred shares are convertible (like STRK), they could potentially dilute common shareholders if converted into common stock. For example, STRK’s 10:1 conversion ratio could increase the number of common shares if triggered, reducing earnings per share (EPS) and ownership percentages for existing common shareholders.
2. **Dividend Obligations**: Preferred stock dividends, such as the 10% annual dividend on STRF or 8% on STRK, are paid before common stock dividends. This reduces the earnings available for common shareholders, which can have an effect similar to dilution by lowering EPS or the funds available for common stock dividends or buybacks.
3. **Future Issuances**: Strategy has indicated it may use common stock at-the-market (ATM) offerings if the share price rises significantly, which could dilute common shareholders. While preferred stock issuance itself is non-dilutive, the broader capital-raising strategy could involve dilutive actions later.
### Strategy’s Specific Context:
Strategy has issued perpetual preferred stocks (STRK, STRF, and STRD) to raise capital for bitcoin purchases, explicitly aiming to avoid diluting common shareholders’ stakes. For example:
- The STRF offering raised approximately $711 million, and STRK raised $563 million, both without immediate dilution to common stock.
- These offerings are structured as perpetual preferred stocks with fixed dividends (e.g., 10% for STRF, 8% for STRK), providing stable income to investors without impacting common shareholders’ voting power or ownership percentage at issuance.
- Posts on X and analyst commentary suggest Strategy’s preferred stock offerings are viewed as a non-dilutive way to fund its bitcoin strategy, with analysts noting “significant accretion” from offerings like STRD.
### Conclusion:
The issuance of preferred stocks by Strategy (STRK, STRF, STRD) is **non-dilutive** to common shareholders in terms of voting control and ownership percentage at the time of issuance, as these shares typically lack voting rights and do not increase the number of common shares outstanding. However, potential dilution could occur if convertible features (e.g., STRK’s conversion option) are exercised or if dividends reduce earnings available to common shareholders. Strategy’s use of preferred stock aligns with a strategy to raise capital for bitcoin purchases while minimizing immediate dilution.