Retained earnings

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IT may not always be safe for the public to rely simply on the figure given for retained earnings in choosing listed stocks. As a precautionary measure, individual investors who are not privy to what transpires inside the boardrooms must review more closely the financial details, including the retained earnings of the company of their choice, before investing in it.

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Before proceeding with this piece, I thank Amnata Pundit, a reader of The Manila Times, for her (I assume this reader is a she, otherwise Amnata should correct me) analysis of the local market. In her comment on “Choosing the best stocks,” she suggested that “your reader study chart analysis and to focus on the monthly charts only for long-term investments.”

Ms. Pundit advised investors: “Do not trade short term, unless you have inside information or is already an excellent chart reader.” She reserved her best comments on the role of brokers as middlemen. “Last but not least, do not listen to your broker when and what to buy and sell,” she wrote. “That they do not exist to look out for your interest is an understatement.”

Ms. Pundit is right. Stockbrokers act mainly as conduits for the public to be able to either buy or sell shares on the Philippine Stock Exchange. In short, investors should be able to select their own stocks for the long haul, as Rem Ramirez, another reader, had suggested in seeking Due Diligencer’s help in investing for the future of his children.

On a personal note, a Japanese confided in me that he bought shares in a listed company through his broker at the stock’s high of P19. He has yet to recover the cost of his placement as the price of that stock has not even topped P8. In this case, Ms. Pundit is right: Do not trust or depend solely on your broker to pick the stocks for you.

Let me go back to retained earnings – one of the indicators of a company’s profitability. The amount of retained earnings reported, either in unaudited quarterly financials or audited annual financial statements, is not what it appears to be. This means the numbers presented in PSE financial postings are not all declarable as dividends either in stock or cash.

As properly presented in PSE filings, retained earnings can either be appropriated or unappropriated. To illustrate: As of Sept. 30, 2015, Globe Telecom Inc. reported retained earnings of P16.48 billion in a consolidated financial filing. Being consolidated, the amount of P16.48 billion includes those of Globe’s subsidiaries, some of which have their own units. Even Bayan Telecommunications Inc. is listed as a Globe subsidiary, which, in turn, owns a number of subsidiaries.

As I wrote in “Choosing the best stocks,” the public should not be misled by the numbers as they appear in financial filings. Not that companies intend to cheat the public. Accounting entries are properly explained in what are defined as “accompanying footnotes.”

In the case of Globe, the company explained in footnote No. 10.4 that of its retained earnings of P16.48 billion, only P6.975 billion, which it described as “unrestricted retained earnings,” is “available for dividend declaration.”

What about the remaining P9.505 billion of the P16.48 billion?

The footnote is the reason why the public should closely monitor a listed company’s financial performance through financial filings. As Globe explained in the same footnote, its retained earnings of P16.48 billion include “undistributed net earnings” of its subsidiaries and joint ventures.

There are other factors to consider in analyzing retained earnings. For instance, a footnote to its quarterly financial report showed “the Globe Group is also subject to loan covenants that restrict its ability to pay dividends.” Does this mean that had it not been for its creditors’ impositions, the company could have distributed more than the dividend of P20.75 per common share that it paid on Sept. 2, 2015 and a similar amount that it will pay on Dec. 4, 2015?

In its quarterly financial filing as of Sept. 30, 2015, Globe reported having paid dividends of P8.263 billion. It said some unrestricted retained earnings of P6.975 billion included net income of P5.434 billion in the first three quarters of the year.

esdperez@gmail.com.

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2 Comments

  1. The last time I checked, I was a male. As for restricted retained earnings, they are meant as fall back for future loan payments, what else? Retained earnings are accumulated over the years, so they reflect the past which is not always a reliable indicator. Better is asset to sales ratio. The more sales vs assets, the better, and this is a better indicator of the current earnings capability of a company than retained earnings which reflect how it did in the past, not how it is doing at present. By the way, the email that Im using exclusively for Manila Times got hacked. I cannot open it anymore. FYI only.