Introduction
In 2019, Berkshire Hathaway provided $10 billion to help Occidental Petroleum buy Anadarko, in the form of preferred stock paying an 8% dividend. The terms required Occidental to redeem the preferred at 110% of face value, dollar for dollar, whenever its distributions to common shareholders exceeded $4.00 a share over twelve months. Occidental redeemed about $1.5 billion of face value in 2023, paying $1.66 billion in cash, and at the end of 2025 about $8.5 billion remained outstanding, costing $679 million a year in dividends. On its balance sheet, the preferred sat in shareholders' equity, at $8.3 billion.
A security with a fixed 8% return and a mandatory redemption clause might look like debt. Whether it is accounted for as debt depends on who controls the redemption. US generally accepted accounting principles (GAAP) give preferred stock three possible homes, and the choice decides where its dividends appear, how it affects earnings per share (EPS), covered in earnings per share: basic vs diluted, and how it is treated in leverage ratios.
Three Possible Homes
The classification turns on the redemption terms:
| Classification | When it applies | Balance sheet | Dividends |
|---|---|---|---|
| Liability | Mandatorily redeemable: an unconditional obligation to redeem on a fixed date or on an event certain to occur | Liabilities | Interest expense |
| Temporary, or mezzanine, equity | Securities and Exchange Commission (SEC) registrants: redeemable at the holder's option, or on an event outside the issuer's control | Between liabilities and equity | Deducted from net income to reach income to common |
| Permanent equity | Redemption, if any, is within the issuer's control | Shareholders' equity | Deducted from net income to reach income to common |
Under Accounting Standards Codification (ASC) 480, a mandatorily redeemable share, one the issuer must buy back on a specified date or on an event certain to occur, such as the holder's death, is a liability, measured like debt. Preferred stock that is not mandatorily redeemable but could be redeemed in circumstances the issuer does not control, such as at the holder's option, on a change of control or if an initial public offering (IPO) does not happen by a certain date, is equity in principle but must be shown outside permanent equity by SEC registrants under the SEC staff guidance in ASC 480-10-S99-3A, as Deloitte's chapter on temporary equity explains.
- Temporary equity
The section of the balance sheet between liabilities and shareholders' equity, often called mezzanine equity, where SEC registrants present equity-classified securities, such as preferred stock or noncontrolling interests, that can be redeemed for cash or other assets on events outside the issuer's control. It signals that the securities may require a cash outflow that management cannot prevent.
Everything else is permanent equity, presented with common stock as described in shareholders' equity explained.
Common Triggers for Temporary Equity
Most mezzanine classifications come from a handful of features:
- Holder put rights: the holder can require redemption after a set number of years or at any time.
- Change-of-control redemption: the preferred must be redeemed if the company is sold, an event the board may not be able to prevent if shareholders approve a deal.
- Deemed liquidation provisions: common in venture-backed companies, these treat a sale or merger as a liquidation that pays preferred holders first.
- Redeemable minority stakes: noncontrolling interests in subsidiaries that the minority holder can put to the parent are also shown in temporary equity.
Venture-backed companies typically carry their convertible preferred in temporary equity until their IPO, when it converts into common stock and moves into permanent equity. Redeemable minority stakes are covered in noncontrolling interest.
Why Occidental's Preferred Is Equity
Occidental's preferred has a mandatory redemption provision, but the redemptions are triggered only by distributions to common shareholders, dividends and buybacks that Occidental's board decides to make. The company cannot be forced to redeem; it can avoid redemption by keeping common distributions below the threshold. It cannot redeem voluntarily before August 2029, after which it may do so at a 5% premium, and dividends are paid only when declared, accruing at 9% if unpaid. With redemption within the issuer's control and no fixed redemption date, the preferred qualifies as permanent equity, as Occidental's 2025 annual report presents it.
Dividends, Redemptions and EPS
For equity-classified preferred, whether temporary or permanent, dividends never reach the income statement as an expense. They are deducted from net income to arrive at net income attributable to common stockholders, the numerator of basic EPS. Any premium paid on redemption above the preferred's carrying amount is treated the same way:
| Line item | 2023 | 2024 | 2025 |
|---|---|---|---|
| Net income | 4,696 | 3,078 | 2,369 |
| Net income attributable to noncontrolling interests | 0 | (22) | (43) |
| Preferred stock dividends and redemption premiums | (923) | (679) | (679) |
| Net income attributable to common stockholders | 3,773 | 2,377 | 1,647 |
| Diluted EPS | 3.90 | 2.44 | 1.61 |
| Preferred stock redeemed for cash | 1,661 | 0 | 0 |
Source: Occidental 2025 Form 10-K. The 2023 deduction includes the 10% premiums on preferred redeemed that year and the gap between its face value and carrying amount. Redemptions are financing cash outflows.
In 2025, preferred dividends absorbed more than a quarter of Occidental's net income, a cost that never appeared in its operating results or interest expense. For preferred in temporary equity, there is one more step: if the security is currently redeemable, its carrying amount is raised to the redemption amount, and if redemption is probable, the difference is accreted over the period to the earliest redemption date, usually with the interest method, or recognized as it arises. Each increase reduces income available to common shareholders in the same way, as described in Deloitte's discussion of EPS considerations.
Convertible preferred adds a dilution question. In diluted EPS, the if-converted method adds back the preferred dividends to the numerator and adds the conversion shares to the denominator if the result is dilutive, as for convertible debt, covered in convertible debt accounting. Occidental's preferred is not convertible; its diluted share count reflects warrants and options instead, and in 2025 the warrants Berkshire received alongside the preferred were excluded from it as antidilutive.
How Bankers Treat Preferred Stock
Whatever its accounting classification, preferred stock is a senior claim ahead of common shareholders, and bankers treat it that way. In the bridge from enterprise value to equity value, preferred is subtracted, usually at its liquidation preference or redemption value, alongside debt, as explained in the equity value to enterprise value bridge. Convertible preferred that is in the money is instead counted in the diluted share count, not both.
Preferred in Leveraged Structures
Private equity sponsors and their lenders also use preferred stock, often at a holding company above the operating business, with dividends that accrue in kind rather than being paid in cash. Economically, such a security behaves much like payment-in-kind (PIK) debt: its claim compounds every year ahead of the common equity. In a returns analysis, the accreted preferred is deducted before calculating the sponsor's or management's common equity value, and in a sale its liquidation preference is paid first, so a large accreting preferred can absorb much of the gain in a business's value.
For credit analysis, rating agencies often give partial equity credit to preferred with long maturities and deferrable dividends, while credit agreements generally exclude equity-classified preferred from debt. For equity analysis, the key figure is income available to common shareholders, not net income: for a company with large preferred dividends, the two can differ by a great deal, and only the first belongs to common shareholders. The related warrant accounting is covered in warrants: equity or liability classification.
