Earnings per share on cumulative preferred stock are also known as cumulative dividend and are a type of obligation for the companies. The earnings per share on cumulative preferred stock are more profitable than the dividends of the common stocks. In case of the cumulative dividends, the company that is supposed to make the payments makes the adjustments to their dividend payments in successive years.
This means that if the company is not able to make the dividend payments as expected and there is a deficit in that particular year then that company would have to add the deficit in its payments in the next year. This might be illustrated with an example.
If a particular company is supposed to pay its shareholders a dividend of ten dollars on each share and is able to pay only five due to circumstances like losses or lack of profit, then in such cases the company is supposed to add that five dollar per share deficit to the per share dividend that would be provided by it in the coming year.
Difference with Normal Share Dividends
The earnings per share on cumulative preferred stock are different from the payment that is provided in case of the traditional shares. In case of the conventional shares, the companies have the luxury of providing the dividend as and when they can. However, in case of the cumulative preferred shares the dividend is more of an obligation.
The company has to pay the cumulative dividend as has been contractually agreed to pay by them even if they suffer losses in their business transactions. The cumulative dividend has to be paid prior to paying the dividends of the common shares.