Investment draw of preferred shares
This month is the traditional implementation period of the plans and programs that companies may have discussed in their year-end corporate planning session last year.
If additional capital may be needed to, for example, fund expansion or explore other business opportunities, the usual approach taken is to ask the stockholders for more investments, or borrow from banks or other financial institutions, or solicit investments from the public.
These methods have inherent advantages and disadvantages depending on the financial health or reputation of the business. For obvious reasons, borrowing from banks and sourcing funds from the public are covered by strict internal and external requirements.
Last year, Ayala Corp., Filinvest Development Corp. and San Miguel Corp., all listed companies that issue corporate bonds from time to time to raise capital, went through the preferred shares route to strengthen their financial capacity.
Their preferred shares offering, which had varying interest rates and redemption periods, attracted institutional and retail investors and earned them P20 billion, P8 billion and P30 billion, respectively.
Since trading in the stock market was in the doldrums, they went directly to the public to raise funds and were successful. The results showed that there was public appetite for that kind of investment.
By and large, this type of offering is, in regulatory and administrative terms, easier to manage compared to corporate bonds and, depending on the quality of the past financing activities between the fund manager and the company, incurs lesser costs.
Preferred shares are usually nonvoting, although some companies give them voting rights under certain conditions or may later be converted to common shares.
Because of the lack of voting capability, the common stockholders (and the members of the board of directors) are able to maintain their control over the company.
Management is assured that, barring any change of mind by the majority stockholders, they will continue to be in the saddle. And with the additional funds provided by nonvoting stockholders, they have more money to use for operations.
For retail investors, especially Filipinos with limited investment experience, preferred shares appeal to their “segurista” (or cautious) character, i.e., the assurance that they will not lose money when they buy those shares and, what’s more, would earn dividends from them at fixed periods.
Unlike common shares listed on the stock market whose prices fluctuate depending on the investment mood of stock traders, the price and dividends of preferred shares remain constant regardless of how the common shares fare at the trading floor.
In other words, the guaranteed receipt of dividends and redemption of the preferred shares far outweigh the benefit of common shares whose value may rise if the company’s business gets booming along the way.
The principal concern of the preferred stockholder, if any, is to make sure that the promised dividends are promptly deposited in his or her settlement account.
A bright spot in investment in preferred shares by Filipinos with limited investible funds is the facility made available by fintechs (or companies that use technology to deliver financial services directly to consumers), like GCash and Maya, that allow such transactions to be made through digital means.
This system appeals to millennials and Generation Z Filipinos who prefer to do banking and other financial transactions with their laptops or cell phones in the comfort of their home or office.
With last year’s successful preferred shares offerings, this year may see them replicated and more retail investors getting into the act, too.
