• Public investors should also own voting preferred shares



    THE public ownership reports (POR) posted on the website of the Philippine Stock Exchange are based only on outstanding common shares and not on the entire outstanding capital stock. As discussed in last Friday’s Due Diligencer, these postings show the control held by the majority stockholders of what are supposed to be public companies.

    San Miguel Purefoods Co., (SMFC), Ayala Corp. (AC) and Aboitiz Equity Ventures Inc. (AEV) are only a few examples of companies that project themselves to be public. They are only listed.

    A listed company has either only outstanding common shares or outstanding capital stock. The former obviously refers to common shares while the latter covers all classes of shares, including common shares that have been issued, of which all or some may remain outstanding.

    Outstanding, on the other hand, covers shares issued to and are currently owned by stockholders. It includes all classes of shares, including common shares again, and preferred shares. The latter may be either voting or non-voting.

    In reacting to a piece here, a reader of The Manila Times expressed surprise over preferred shares having voting rights, saying that it is only in the Philippines where their holders are allowed to vote even in the election of members of the board.

    Retained earnings
    The public may find the sub-topic puzzling. They should not be surprised because like common shares, their dividends, whether in cash or in stock, depends on the availability of retained earnings.

    In turn, retained earnings may either be appropriated or unappropriated. In a number of cases, listed companies simply divide the retained earnings into these two categories to circumvent the rule imposed by the Securities and Exchange Commission.

    That rule does not allow a listed company to keep in its books retained earnings more than 100 percent of its outstanding capital. The excess should be declared as dividend.

    Listed companies have found a way to evade the rule by classifying as “appropriated” a certain portion of their retained earnings when these exceed the allowable limit.

    When the time comes for the declaration of dividend, the same listed companies revert the appropriated amounts to “unappropriated” to meet the amount for distribution as dividend.

    For the public investors to determine the outstanding capital of listed companies, they should not rely on PORs that deal only with outstanding common shares. A PIS includes the audited financial statement of a listed company.

    In its PIS, Purefoods reported in Footnote 19 dividends of “P62.42675 and P80 per share in 2015 and 2014, respectively.” The owners of the company’s common shares got “P4.80 and P51.60 per share in 2015 and 2014, respectively.”

    The PSE website also listed dividends paid by Purefoods and AC reported dividends for both common and preferred shares.

    Aboitiz Equity, represented by AEV as its market symbol, had only declared P1.06 per common share, which it paid on April 19, 2016. This did not mean it did not have preferred shares. It had, but had not issued any.

    AEV has authorized capital stock consisting of 10 billion shares, with par value of P1. It consists of 9.6 billion common shares and 400 million preferred shares. Of the common shares, 5.695 billion are issued, of which 140.333 million are treasury shares.

    Aboitiz Equity has not issued any of its 400 million preferred shares. Is the company reserving them for a future capital-raising exercise?

    Sourcing dividends
    The holders of common shares among the public investors may not be as lucky as those holding preferred shares. While the latter earn fixed interest rates, which are classified as dividends, common shareholders have to content themselves with what are made available to them by the boards.

    Listed companies usually announce their dividend policy covering common shares as a certain percentage of the previous year’s net profits. They don’t do the same for preferred shareholders, who, instead, are paid at a fixed percentage, be it 5 percent per annum, or maybe even higher.

    While strictly speaking, preferred shares may be a form of liability, they are treated as equity in financial filings. As such, their dividends are sourced to retained earnings, placing them at par, if not better, than common shares. As a matter of fact, as their classification suggests, their earnings, which may come at more than five percent per annum, are paid ahead of common shares.

    Now that you know the reason for the inclusion of retained earnings, doesn’t all this make preferred shareholders much luckier than the public who, in most instances, hold only common shares? Just asking.



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    1 Comment

    1. Napapanahon na po na magkaroon ng himagsikan sa hanay ng mga stockholders at mga adbokasiya para sa mga maliliit na stock holders. Ang problema sa atin walang boses ang SEC at walang pangil ang batas kaya makikita natin na kakarampot ang dividindo napupunta sa common stockholders kumpara sa Preferred stockholders.