Wise utilization of retained earnings

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EMETERIO SD. PEREZ

THE amount of retained earnings determines the ability of listed companies to distribute dividend either in cash or in shares of stock. The bigger retained earnings the better for the public investors who trade on listed shares.

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That’s the general rule.

In consolidated financial fillings, holding companies include the retained earnings of subsidiaries. In this case, public investors turn to the footnotes for the elaboration of financial entries.

In the case of San Miguel Corp., for instance, it is easy to find the footnotes, which the company suggests inside pairs of parentheses.

If a holding company’s subsidiaries are also listed, it is much easier to segregate the retained earnings of the parent company from the amounts that their units report individually. Simply surf www.edge.pse.com.ph for both the parent and the subsidiaries for their retained earnings shown in quarterly and audited annual reports.

In some instances, a number of holding companies separate the parents’ financial performance from their units in either quarterly of audited financial filings. Good for the public.

Retained earnings: PSE
Accumulated net profits that make up retained earnings or surplus are among the entries under equity. The amount of retained earnings is broken into appropriated and unappropriated.

To illustrate: the Philippine Stock Exchange (PSE) reported in its first-quarter financial filing for 2017 a total of P994.487 million in retained earnings. Of the P994.487 million, it classified P873.487 million as unappropriated and P121 million as appropriated.

When the PSE paid a P7-per share dividend on April 27, it sourced the amount from its unappropriated retained earnings of P1.232 billion as of Dec. 31, 2016. After distribution of the dividends, the PSE had P873.487 million left in its book as unappropriated retained earnings.

Luckily for its stockholders, unlike some other listed companies, the PSE has only 73,416,777 outstanding common shares of its authorized capital stock of 120 million common shares with par value of P100.

The public investors could still expect the PSE, it being a listed company, to distribute stock dividends instead of cash because it still has 46,583,223 unissued common shares, out of 120 million common shares in its authorized capital stock.

Such stock dividends depend on the amount of retained earnings that PSE has piled up under equity.

Retained earnings: JG Summit
JG Summit Holdings Inc. is the listed holding company of businessman John Gokongwei Jr. and his family.

As of the March 31, JG Summit had retained earnings of P187.881 billion, of which, according to a footnote, it has appropriated P97 billion for settlement of a certain subsidiary’s loan obligation which it had guaranteed; and funding of capital expenditure commitment of certain wholly owned subsidiaries.

As to the third use of its restricted retained earnings, JG Summit said it has also set aside part of the amount for what it classified only as general corporate purposes.

In the same footnote, JG Summit identified JGSH Philippines Ltd. as a subsidiary, with two loan obligations: 1) $250 million, with 2017 as the settlement date, but indicated no definite date; and 2) $750 million, with a 10-year maturity, or until 2023.

As the parent company, JG Summit had loan obligations in the form of P30-billion retail bonds maturing in 2019, 2021 and 2024.

In a general information sheet, JG Summit reported its authorized capital stock consisted of 12.851 billion common shares with P1 par value; 2 billion non-voting preferred shares with P1 par value; and 4 billion voting preferred shares with P0.01 par value.

Of its authorized capital stock, only Gokongwei Brothers Foundation Inc. owns 4 billion worth of voting preferred shares, enabling the Gokongwei family to control and elect all the members of the 11-person board of JG Summit, including the appointment of three independent directors.

Due Diligencer’s take
JG Summit and the PSE are two listed companies that showed public investors how to use retained earnings. In the case of the former, its own consistent profitability and those of its various subsidiaries allowed it to guarantee the borrowings of its units when it wants to.

Lucky are the independent directors of JG Summit for their appointment to the board. Had they not been acceptable to the Gokongweis, they would not have been allowed to sit on the board.

On the other hand, the PSE sourced the payments of its dividends from its retained earnings. As of March 31, it reported P513.917 million as “dividend payable in a quarterly financial filing. It similarly included P513.796 million as dividend payable in its first-quarter report in 2016.

The use by Due Diligencer of JG Summit and PSE is only to illustrate to public investors how listed companies divide their retained earnings into restricted or appropriated and unappropriated. It is important to understand the utilization by listed companies of their retained earnings.

By paying maturing loans, listed companies gain more leeway in distributing future dividends. Hopefully, both JG Summit and PSE would give out stock dividends to make use of their unissued common shares.

esdperez@gmail.com

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