Investors’ option: SMC preferred or common shares

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Holders of preferred shares in San Miguel Corp., as well as in other listed companies, are lucky because they are paid dividends ahead of common shareholders. The dividends due them are sourced to SMC’s unappropriated retained earnings, which totaled P121.975 billion as of March 31, 2015. This “turn-off” factor could be what has been “alienating,” to use the words of a reader of The Manila Times, investors in SMC’s listed common shares.

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To better illustrate this “alienation,” the public may want to look more closely at SMC’s capital stock of nearly 3.725 billion shares, divided into 2.379 billion common shares and 1.346 billion preferred shares. The latter, in turn, are further divided into 279.406 million SMCP1; 721.012 million SMC2A; 90.428 million SMC2B; and 255.559 million SMC2C.

As of July 21, SMC’s market capitalization stood at P138.668 billion, computed at P58.30 per common share. On the other hand, its preferred shares were issued at P75 each, the same market price for the common shares at the time of issuance, for gross proceeds of P100.98 billion. At 7.5 percent per annum, SMC would be paying P7.5735 billion per annum as dividends to owners of more than 1.346 billion preferred shares. When computed, this would translate to P5.625 per share, against P0.35 per common share each quarter, or P1.40 per annum.

Too big to fall
San Miguel used to be classified under “food, beverage and tobacco” because of its main product which was—and still is—San Miguel Pale Pilsen. It is now a holding company and is under such category in the PSE’s daily market reports.

Being a conglomerate, San Miguel may be too big to fall despite its long-term debt of P116.692 billion. Making up for that debt is its retained earnings of P204.142 billion, of which P121.075 billion remained “unappropriated.” It carried in its book P139.881 billion worth of treasury shares.

These financials indicate a very strong SMC, which is even made stronger by additional paid-in capital (APIC) amounting to P178.125 billion. Don’t be easily deceived by the numbers. The first question to ask: How did SMC pile up this much APIC? The answer or answers should make you decide whether to buy or avoid SMC common shares.

Aside from having a heavy load of debt, San Miguel has issued so many preferred shares that would deprive holders of common shares of a more generous dividend either in cash or in stock. Incidentally, if you were to strictly define preferred shares, they are, in fact, borrowings or debts even though their yields are expressed in dividend.

Preferred shares
Remember how the government-held CIIF funds used to own SMC common shares but ended up holding SMC preferred shares? Back in 2009, SMC created its first series of preferred shares by offering “existing common shares of up to approximately 35 percent of the issued and outstanding capital stock of the Parent Company with Series I preferred shares.” As a result, SMC issued a total of 444,503,353 Series I preferred shares.

The government, then holding at least 21 percent of SMC’s voting stock, was among the stockholders who took up the offer to take advantage of earning 8 percent interest per annum. At P75 per share, the stock swap resulted in APIC amounting to P31.115 billion.

Since then, San Miguel has made the issue of preferred shares a major capital-raising exercise. In October 2009, it issued 97.333 million preferred shares at P75 per share for APIC of P60 per share. It followed this up with an offering of 1.067 billion Series 2 preferred shares—a much bigger issue—also at P75 each in June 2012.

As of March 31, 2015, SMC had APIC of P178.125 billion, which is 5.712 times its APIC of P31.183 billion, reported in SMC’s 2008 financial statement. That’s seven years ago when the company and its subsidiaries had accumulated long-term borrowings of P48.56 billion.

Today, SMC alone, meaning, minus subsidiaries’ debts, reported long-term borrowings of P116.692 billion, a huge jump from P29.305 billion in 2008. This heavy debt burden caused SMC “interest expense and other financing charges” of P29.71 billion in 2014; P30.97 billion in 2013; and P29.8 billion in 2012.

Luckily, preferred shares are part of a company’s equity. If not, SMC would have spent even more in interest payments to the tune of P7.5735 billion a year at 7.5 percent interest per annum.

esdperez@gmail.com.

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1 Comment

  1. Amnata Pundit on

    Since there are other listed companies who issue preferred shares, what makes SMC’s preferred shares look uniquely bad? Is it Danding Cojuangco’s Coco Levy funds, the yellow tribe’s object of deep envy since the ’70s? I will not go into the details of the black propaganda that is wrapped around this so called mother of all scams, let me just state one glaring fact: a scam is by definition a crime, yet no criminal charges were filed against Danding and company as all the cases filed were civil in nature. For Danding haters, what makes the preferred shares swapped for the common shares of the coco funds grating is that since preferred shares cannot vote, the swap took away the yellow tribe’s power to kick Danding and Ramon Ang from the management of SMC. Of all the assets squestered by Cory’s PCGG, only the coco levy funds were spared from dissipation by Cory’s wolves in sheep’s clothing because of the brilliant way these funds were tied up in SMC by Danding. If the coconut levy was an anomalous crony deal, what do you call for example the acquisition by yellow oligarch Aboitiz of a government owned power barge in Mindanao on the cheap and selling back the power it produces to the public at a mercilessly price gouging level, and this in the midst of a power crisis in that island? If anybody can find a Marcos crony deal that is as onerous or worse than this Aboitiz deal I will kneel before the tomb of Ninoy and Cory Aquino and eat the paid one day circulation of the Manila Times, no salt needed. Is there a yellow zealot out there who is willing to eat the paid circulation of the Inquirer if he cannot find an asset sequestered by Marcos that was dissipated? Stocks can be talked up like BW or Calaca, and they can be talked down too like. well, SMC, but only those who are shorting SMC, which is illegal, and those who want Danding and Ramon Ang to suffer want to see SMC’s shares fall to the floor. If SMC is over leveraged, the facts not propaganda should be clearly laid out to the public by way of SMC’s debt to equity ratio, debt to sales and debt to assets ratio. Mind you, many banks in Europe and America are leveraged up to 26x, meaning they owe $26 for every $1 dollar of asset, but for the last several years now their shares in the stock market have been on a bull run, showing that over leveraging can be ignored by the market, but not apparently, black propaganda. Now for a strictly clinical discussion of what preferred shares are, you said by strict definition a preferred share is a liability but you did not give anybody a chance to agree or disagree because you did not say what this strict definition is, although you yielded a clue by using the word yield instead of dividend. In the world of bonds a yield is what the holder gains and that same yield is the issuer’s interest payment. But a bond or a note has a due date, or a redemption date for preferred shares to tell the world when the liability should be paid in full. A preferred share has none of that unless they changed the rules without telling us, so it cannot be a liability if the issuer is not obligated to redeem it fully at anytime. These shares have been around as far as I can remember and I’ve been around for a long time so I know SMC and Ramon Ang did not invent preferred shares just recently, and all that time these shares were never treated as a liability. If SMC were forced to treat these preferred shares a liabilities, that will severely impair their balance sheet, and you know what that could do to their shares in the stock market. Do you like the sight of yellow ribbon wearing chimpanzees jumping up and down in glee?