• Preferred shares are borrowings that earn dividends, not interest

    Emeterio Sd. Perez

    Emeterio Sd. Perez

    THE Zobels, majority owners of the Ayala group thru Ayala Corp. (AC), are further expanding the conglomerate that they control with a gargantuan budget of P185 billion this year. With such a huge amount to spend, there is no doubt they could successfully implement what AC described in a press release as “the massive expansion of its core business, particularly its real estate and telecom units.”

    The P185-billion planned budget is no mean amount. Sadly, only the Zobels and their financial thinkers, and perhaps a few other company insiders privy to AC’s financials, are aware of the potential sources of this funding requirement. Either they omitted the information or forgot all about the full disclosure policy that governs what should be honest trading in listed stocks.

    A few words of caution: Whenever I take up the subject of money, I have often said that such and such company does not enjoy the monopoly of omission of facts in their disclosures. And I am adding this time that the posting of incomplete disclosures continues because of the failure of the Securities and Exchange Commission (SEC) to read the disclosures and explain them. Besides, even the public has become too passive to notice omissions in corporate postings on the Philippine Stock Exchange (PSE) website.

    To go back to AC’s press release, I think that basically, it provided the information on the amount of money – P185 billion – for “capital expenditures” in 2015. Incidentally, the sum of money being in the billions should make for a good headline. The question is where AC would get the money, which would be a guessing game among the public.

    If anyone among the individual investors would look at AC’s financials, they would find consolidated retained earnings of P105.2 billion, of which P73 billion represents accumulated equity in net earnings of subsidiaries and P5 billion covers treasury shares. Net of these two items, P27.3 billion is left for the public to make another guess if AC would really declare the whole amount as dividends either in cash or in stock.

    Now let’s look at AC’s capital profile. As of Dec. 31, 2013, its authorized capital stock consisted of 900 million common shares with a par value of P50; 12 million preferred A shares with a par value of P100 and 40 million preferred C shares with a par value of P40. As of Sept. 30, 2014, which is the latest financial filing, AC had 20 million outstanding preferred B shares; 200 million voting preferred shares and 600.6 million outstanding common shares. In yesterday’s PSE posting, AC reports it has a total of 619.4 million issued and outstanding shares which, when deducted from 900 million authorized common shares, would leave AC with 280.6 million unissued shares.

    In a quarterly financial filing, aside from 600.6 million out standing common shares, AC also listed 40 million treasury shares—divided into 12 million preferred A shares and 38 million preferred B shares. At 500 per preferred share, AC could raise P200 billion, which could be an added burden on the holding company’s profitability.

    From January to September 2014, AC reported having short-term debt of P14.04 billion and long-term debt of P233.96 billion. In the same period, it said it paid its creditors P9 billion in “interest and other financing charges,” up 24.6 percent from P7.2 billion paid to its creditors in the same period in 2013.

    To a listed company, there is an advantage of issuing preferred shares because these shares represent ownership. As owners and not creditors, which they really are, they earn not interest but dividends, which are taken from retained earnings.

    Pity the traders in listed common shares. A reader of Due Diligencer has already raised the alarm on listed companies’ penchant for issuing preferred shares, but his complaint has apparently been totally ignored.



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    1. Perhaps it is about time to revisit the relationships between common stock and preferred stock. My take is preferred stock should not be higher than common stock under authorized, subscribed and paid up. This is to justify real ownership and management of corporations. I agree that preferred stocks are actually borrowings which should be under liability section of the balance sheet. It will be unfortunate if greater monetary risk is carried by preferred stockholders who have no say in management.About time to stop this anomaly if it is happening. Poor investors who chose stocks as alternative form of investments should be protected.