DON’T get excited over the huge retained earnings reported in financial disclosures of listed companies. Because the amounts are based on consolidated financials, as public investors should have learned, not all are declarable as dividends either in cash or in stocks.
For instance, a filing posted on the website of the Philippine Stock Exchange listed the restrictions on the retained earnings of Ayala Corp. as follows: P29.82 billion in 2007 and P24.86 billion in 2006.
This means an investor owning AC common shares should take into account these deductions from the year’s total retained earnings. For example, AC’s retained earnings as of Dec. 31, 2007 amounted to P60.46 billion, up from P51.66 billion as of Dec. 31, 2006. The increase represents the net income for the year.
Deducting P29.82 billion from P60.46 billion would be equal to P30.6 billion. The difference still had a further restriction in the cost of acquisition of treasury shares, which was P159.7 million.
From patriarch to siblings
Incidentally, 2007 was the first full year when Jaime Augusto Zobel de Ayala and his brother Fernando took over from their father, Don Jaime Zobel de Ayala, as chairman and chief executive officer and president and chief operating officer, respectively.
As chairman and vice chairman of the board in 2007, the Zobel siblings were AC’s top managers who were running a company with 58 million preferred B shares and 414.4 million common shares. While they succeeded in charting AC’s profitability which resulted in so much retained earnings, it also reported P50 billion as “amount of debt outstanding as of Dec. 31, 2007.”
Yes, Jaime Augusto and Fernando did well with the support of the members of AC’s management team who were not strangers to them. As regular directors before 2007, they must have found the seven-man board a good training ground for their eventual takeover of the family’s holding company by the time their father retired in 2006.
Here are some numbers that would show how the Zobel brothers fared as AC’s top men. In 2007, AC reported that its revenues increased 12 percent to P78.7 billion from P70.2 billion in 2006 and from P50.5 billion in 2005.
2006: Good start
These revenues, however, included “other income” of P10.7 billion in 2007; P7 billion in 2006; and P5.9 billion in 2005. Topping the entry under “other income” in an explanatory note were gains of P8.8 billion, P5.5 billion and P4.6 billion in 2007, 2006 and 2005 respectively that AC reported were from sale of investments.
Without these gains on sale of investments, AC could not have earned the following net profits: P19 billion in 2007; P14.5 billion in 2006; and P10 billion in 2005. These translate to earnings per share of P36.63 in 2007; P28.70 in 2006; and 19.80 in 2005.
By Dec. 31, 2014, AC’s outstanding capital stock consisted of 20 million preferred B Series 1; 27 million preferred Series 2; and 200 million voting preferred shares for a total of 247 million preferred shares. In addition, AC had 619.4 million common shares. (As of Friday, it had 619.6 million outstanding common shares.)
2014: Going strong
In its audited financial statements, AC reported net profit of P32.27 billion in 2014, up 34 percent from P24.12 billion in 2013 and from P19.5 billion in 2012. These net profits resulted from revenues which increased 15.6 percent to P184.3 billion in 2014, from P159.4 billion in 2013 and P130.6 billion in 2012. Earnings per share in 2014 stood at P29.83, up from P20.53 and P17.03 in the previous two years.
As of March 31, 2015, AC reported retained earnings of P112 billion, of which only P29.73 billion is available for dividends.
Finally, if AC has been doing well under the Zobel brothers, here is how it has been generous to them and to the rest of the members of its management team: As a group, it paid its top 16 executives led by the CEO and COO P164.62 million in salaries and P226.94 million in bonuses in 2006. The following year, it raised their combined salary to P176.07 million but reduced their bonuses to P122.45 million.
For comparison, here is the list of executive compensation in the last three years based on AC’s annual filing: Only six instead of 16 top executives led by Jaime and Fernando Zobel received P199 million salaries and P131 million bonuses in 2013; and P215 million and P175 million in 2014. By the end of 2015, the group would have been paid P234 million and P127 million.
These reports and analyses are not intended to take away the credit from the Zobel brothers for the continuing growth and expansion of the family-controlled conglomerate. Rather, they are aimed at informing the public investors on the importance of going over financial postings before going on an investing spree.