Dividend Sustainability Risk in Preferred Shares: A Credit and Cash Flow Analysis

Investors seeking stable income often turn to preferred shares, which offer fixed dividends and priority over common stock in bankruptcy. However, the sustainability of these dividends is far from guaranteed. Between 2020 and 2025, global markets faced unprecedented volatility, with credit rating downgrades and cash flow shortages emerging as critical risks for preferred shareholders. This article examines how these factors have impacted dividend reliability and what investors should watch for in 2025 and beyond.

Credit Rating Downgrades: A Canary in the Coal Mine

Credit ratings serve as a barometer of a company's financial health. When ratings fall, they often signal deteriorating liquidity or leverage, which can directly threaten dividend payments. For example, Fossil Group faced a severe downgrade in late 2025, with S&P Global Ratings slashing its issuer credit rating to SD from CC. This downgrade coincided with a $39.9 million third-quarter loss and a distressed refinancing that extended debt maturities. The move not only triggered a 10% stock price drop but also raised concerns about its ability to service preferred dividends.

In contrast, Statkraft AS received a more measured downgrade from A to A- by S&P in 2025, reflecting weaker performance and financial metrics. While the company maintained its long-term rating targets, the downgrade underscored the fragility of its capital structure. Such cases highlight how credit agencies act as early warning systems, flagging risks before they materialize into dividend cuts.

Cash Flow Constraints: The Silent Killer of Dividends

Cash flow shortages, often exacerbated by macroeconomic shocks like the pandemic, have forced companies to prioritize survival over shareholder returns. A 2023 study in the Journal of Econometrics found that firms with high-frequency cash flow volatility were more likely to suspend preferred dividends during crises. This pattern held true in 2025, when Two Harbors Investment Corp (TWO) cut its common dividend by 13% due to a $198.9 million litigation contingency. While not directly tied to a credit downgrade, the move illustrates how liquidity pressures can erode confidence in preferred dividends.

The flexibility of preferred dividends-unlike mandatory bond interest-allows companies to defer payments during cash flow crunches. However, this flexibility comes at a cost: repeated deferrals can signal deeper financial distress. For instance, U.S. Bancorp's preferred shares were downgraded to a "Hold" rating in May 2025 due to interest rate uncertainty, raising the specter of future cuts.

Preferred Shares as a Strategic Tool: Lessons from 2025

Despite these risks, preferred shares have resurged as a strategic tool for companies navigating cash flow challenges. In 2025, Intact Financial Corporation issued CAD 150 million in 5.5% non-cumulative preferred stock, backed by a stable "bbb" rating from AM Best. The issuance improved leverage metrics while maintaining investor confidence, demonstrating how disciplined capital management can mitigate dividend risks.

Meanwhile, Statkraft's downgrade to A- in 2025, though negative, aligned with its long-term rating targets. This suggests that proactive communication and transparent financial planning can cushion the blow of credit downgrades, preserving dividend sustainability.

Conclusion: Navigating the Risks

For investors, the key takeaway is clear: credit ratings and cash flow metrics must be central to preferred share analysis. While companies like Intact Financial show how prudent management can insulate dividends, cases like Fossil Group and Statkraft underscore the fragility of fixed-income-like returns. As 2025 unfolds, monitoring leverage ratios, liquidity buffers, and credit agency commentary will be critical to avoiding dividend disappointments.