FGen more generous to holders of preferred shares



A READER of The Manila Times who identified himself as Domeng Fajardo, emailed Due Diligencer in connection with the piece on the generosity of First Gen Corp. (FGen) in doling out dividends to First Philippine Holdings Corp. (FPH), which is FGen’s majority stockholder. He wrote:

“I have read your column on the subject, which, please bear with me, I cannot anymore recall the date.

“Again on June 19, 2013, disclosure of FGen cash dividend was again declared for its series F and series G preferred shares in the amount of P4 and P3.8904, respectively, payable on July 25, 2013. “Mr. Perez, I am a retired employee of a private company in Makati which is primarily depending on SSS pension and interest on some of my investment and if lucky, on cash dividend on some on my stock investments which include FGen stocks. I cannot really understand why preferred shares are being entitled to cash dividend.

“To my understanding, preferred shares are fixed-income investments that carry a coupon or guaranteed interest rate. Assuming there are preferred shares that are entitled to cash dividend, don’t you think it is unfair for us ‘common share’ holders to be left out in the distribution of earnings.

“I don’t want to think Mr. Perez that it is the way of FPH, in which the Lopezes has more economic interest than in FGen, to siphon the earnings of FGen.”

Mr. Fajardo was referring to the item on the distribution of dividends by First Gen Corp. that benefited mostly First Philippine Holdings Corp., which is FGen’s majority stockholder which belongs to the group of companies controlled by the Lopezes.

He is right when he wrote that preferred shares are fixed-income instruments that earn interests, which should make them liabilities. Unfortunately for Mr. Fajardo and others who are in the market for dividends most listed companies do not treat such shares as liabilities anymore but as a form of ownership.

Remember the Supreme Court ruling in Wilson Gamboa vs PLDT case? While the High Court said preferred shares are in theory like bonds that earn interest, it nevertheless recognized them as part of capital.

Many years ago, I attended a seminar on accounting organized by SGV & CO. During the open forum, I asked the lecturer why preferred shares should be among the entries under capital in the stockholders’ equity when in reality they are debts of a corporation. I don’t recall anymore his response probably because I did not agree with him.

Incidentally, Mr. Fajardo conclude his letter with a message to the Securities and Exchange Commission to please look into the Lopez-owned companies’ generosity to themselves by dipping into the retained earnings which should otherwise go to owners of common shares.

Retained earnings, as the public investors understand, represent a company’s accumulated net profits over the years. The amount could either be appropriated or unappropriated. The latter is reserved for declaration as dividend either in cash or in stock.

If only the officials of the Securities and Exchange Commission would review the policies governing retained earnings, then they would probably discover that payments of interest to holders of preferred shares should not have been allowed.

After all, when a listed company reports its financial performance, it usually includes after net income the EPS or earning per share, referring, of course, to common shares and not to preferred shares. Otherwise, PLDT’s A to Z preferred shares would have resulted in the company’s zero EPS—and worse, in the negative.

Through Due Diligencer, Mr. Fajardo, being an LOI (living on interest), is seeking SEC’s help in making listed companies also generous to owners of common shares. Apparently, he meant the agency, as the market’s regulatory agency, may want to review the dividend policies of public companies to determine which among them practice the dictum “charity begins at home.”



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