SEC rule on dividends

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Emeterio Sd. Perez

Emeterio Sd. Perez

THE amount of retained earnings determines the ability of a company to declare dividends, which, of course, is subject to the decision of the board.

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But said declaration of dividend does not happen often because listed companies prefer to keep most of their profits intact to finance their expansion. After all, there is more prestige in being big although the size does not necessarily spell profitability. Still, there are companies that regularly share their profits with their stockholders by declaring quarterly and sometimes special dividends. But naturally, they prefer to preserve most of their retained earnings for future use.

San Miguel Corp. (SMC), for example, has been declaring quarterly dividend of P0.35 per common share, or a total of P832.9 million, or P3.3 billion a year. Despite this, as of June 30, 2013, it had accumulated retained earnings of P174.6 billion of which it has appropriated P28 billion for capital expenditures.

But don’t be deceived by these numbers because SMC’s unappropriated surplus also “includes the accumulated retained earnings of associates” amounting to P45.8 billion in 2012; P44 billion in 2011 and P55.6 billion in 2010.

“Such amounts are not available for declaration as dividends until declared by the respective investees,” SMC said in a financial filing.

But is SMC the only public company that has been piling up net profits over the years?

No. There are others that are similarly engaged in “profit hoarding” because the SEC tolerates the practice.

Here are some of them and the retained earnings they are keeping in their books (appropriated amount inside parentheses): Ayala Corp., P89.2 billion; Aboitiz Equity Ventures Inc., P77.4 billion; Alliance Global Inc., P48.7 billion (P1.4 billion); JG Summit Holdings Inc., P126.3 billion; Manila Electric Co., P43.2 billion (P11 billion); Philippine Long Distance Telephone Co., P20.9 billion (Note: As parent only, PLDT has P16 billion available for dividends) and SM Investments Corp., P106.5 billion (P27 billion).

Why are these listed companies—and probably several others not listed here—able to maintain so huge retained earnings?

The answer is simple. The Securities and Exchange Commission (SEC) has every rule to check every corporate abuse. But in dealing with the use of retained earnings, it could be presumed that the lawyers who crafted it have provided for exceptions that leave room for abuse.

Yes, the rule remains posted on the SEC’s website for everyone to appreciate. It proclaims that, “shareholders have the right to receive dividends,” which, sad to say is conditional because such the enjoyment of such right is “subject to the discretion of the board.”

While the “board approval” may be restrictive in the distribution of dividends, the SEC assured that as the regulator of securities industry, it “may direct the corporation to declare dividends when its retained earnings is in excess of 100 percent of its paid-in capital stock . . .”

Until here, it is encouraging to note that the SEC, is, after all, also exists for the protection of stockholders, except that, as the saying goes, in every rule, there is an exception.

Said declaration of retained earnings “in excess of 100 percent of its paid-up capital stock,” according to the rule, is not applicable compulsory in instances as follows:

“a) when justified by definite corporate expansion projects or programs approved by the Board” which would be easy to do because what is definite is not defined;

“b) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its consent, and such consent has not been secured.”

Why should a company engage in a borrowing spree to the detriment of stockholders? Borrowing beyond one’s capacity to pay would be at the expense of stockholders, particularly the public, and more importantly, dangerous to a company’s financial health.

“or c) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies.”

Will the SEC spell or define for the public these “special circumstances” and “contingencies? All companies should be well-prepared for them but they should leave something for the stockholders, particularly the public, who are never privy to the goings-on inside the board controlled by the majority.

esdperez@yahoo.com

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