US Airways had indefinitely deferred the quarterly dividend on its $358 million of cumulative convertible 911⁄4 percent 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, Berkshire Hathaway, the large company runs 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 shares of US Airways' common stock at $38.74 per share at a time when the market value had risen to $62.
What is cumulative convertible preferred stock? Why deferring dividends on those is 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?