GMA Network Inc. is a rare listed company.  It declares dividends not out of surplus in prior years but out of retained earnings plus net profit in current year, which refers to the year when dividends are declared.

Here is what happened inside the boardroom of GMA Network before the company sold shares through an initial public offering: its board approved the declaration of dividend amounting to P2.875 billion, of which P375 million was in stock, in 2007. These dividends came in three tranches—P1.50 billion on March 19, 2007; P375 million in stock on April 26, 2007; and P1 billion on July 2, 2007. To determine who were entitled to these dividends, the board set the record dates on the same dates it approved them. Because its generosity came before the sale of GMA Network shares to the public, the Gozons, Jimenezes and Duavits and their allies benefited from the board’s generosity, which of course they—the existing stockholders—proposed and approved through the board which they control then and now. Incidentally, GMA Network listed its shares on July 30, 2007 after selling shares to the public at P8.50 each. The public missed the board’s charitable gesture by 22 days.

If one were to review the distribution of dividends by GMA Network against retained earnings, he or she would find out that the broadcast group, which owns and operates Channel 7 and radio station DZBB, did not have enough surplus in prior year, that is, in 2006, as this amounted to only P1.94 billion when it was to give out a total of P2.875-billion dividends, which its board declared up to July 2, 2007. It was short by P934.84 million!

GMA Network showed how it could beat the ordinary way of declaring dividend, which was against surplus of prior year: it waited for fiscal year 2007 to end. With its profit for the year, it had more than enough to cover the year’s P2.875 billion in dividend. The filings showed the details: As of January 1, 2007, GMA Network had retained earnings of P1.94 billion, which when added to its net income of P2.307 billion for the 2007 equals P4.247 billion, as the report did. By deducting from the sum the dividends for the year, then GMA Network would end, and it did, with surplus of P1.372 billion.

(In its report for the first six months, which was not audited, GMA Network already deducted P1.5-billion dividend and P375-million stock dividend from its retained earnings of P1.94 billion, an amount which was beefed up by P1.126-billion net profit for the period, leaving the company with P1.192 billion in retained earnings by the end of the semester. It omitted P1-billion dividend, which the board declared on July 2, 2007, which was outside the six-month period.)

What happened to the public stockholders who had hoped GMA Network would end 2007 with a bigger surplus retained earnings of P4.247 billion (P1.94-billion retained earnings in 2006 plus 2007 net income of P2.307 billion)? They should wait for GMA Network to pile up net profits in a few more years before they could expect dividends, which the company said it would distribute to its stockholders. But since it is now a public company, it could no longer be as generous as it was prior to its IPO; its new policy is to declare dividends only out of surplus in prior year. This means for 2008, GMA Network’s P1.372 billion in surplus would translate to P0.408 per share cash dividend.

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The dividends may come later if not sooner for the public investors who may have to look at the consistent profitability of GMA Network if only to assuage their feelings against the use of 2007 net income for the dividends declared during the year that came too late to benefit them.

Under the new dividend policy adopted by GMA Network, how will its stockholders “receive annual cash dividends equivalent to a minimum of 50 percent of the prior year’s net income based on the recommendation of the board of directors” when it used up its net profit in 2007 as retained earnings to fill up the shortfall in its surplus for 2006 to pay for its P2.875 billion dividend its board approved in the first seven months of 2007? If one were to go by the disclosures, GMA Network would declare this year P1.1535- billion dividend, whether in cash or in stock. The amount represents 50 percent of net income in 2007.

Again, here is how generous GMA Network to its owners before its IPO: The filings posted on the web site of the Philippine Stock Exchange showed the network reported total net profits of P7.776 billion in the last four years—P2.307 billion in 2007; P1.962 billion in 2006; P2.005 billion in 2005; and P1.50 billion in 2004. In the same period, it gave out P7.523-billion dividend—P286-million cash in 2004; P218.521 million in cash and property and P3 billion in cash in 2005; P1.15 billion in cash and property in 2006; and P2.50 billion in cash and P375 million in stock in 2007. After these dividends, P253 million was left of its net profits, which it registered from 2004 to 2007. 

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GMA Network Inc. is a rare listed company.  It declares dividends not out of surplus in prior years but out of retained earnings plus net profit in current year, which refers to the year when dividends are declared.