Philippine Markets Newsletter

Uniform Accounting reveals the TRUTH behind the high-dividend companies this UITF invests in.

June 25, 2020

This bank employs a dividend investment approach in managing one of its unit investment trust funds (UITFs).

This UITF aims to surpass its benchmark, the Philippine Stock Exchange Index (PSEi), by focusing on companies with long-term growth potential and high dividend payouts.

As-reported metrics would leave investors confused with the fund’s stock picks. However, Uniform Accounting financial metrics help make sense of the fund’s investments and how they fit into the bank’s investment philosophy.

In addition to examining the fund’s portfolio, we are including fundamental analysis of one of the fund’s largest holdings, providing you with the current Uniform Accounting Performance and Valuation Tearsheet for that company.

Philippine Markets Daily:
Friday Uniform Portfolio Analytics
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Dividends represent shares of a company’s profit paid out in cash to shareholders.

It is important to note though that not all companies pay dividends. In most cases, companies decide whether or not to distribute dividends based on several fundamental factors such as the general state of the economy, their ability to sustain dividend payments, and their growth prospects.

Smaller firms may opt to reinvest their earnings to pursue growth opportunities. Meanwhile, the more established, stable ones may choose to pay out dividends to attract more investors.

Fund managers who utilize a dividend investment strategy look for established and stable companies that provide consistent dividend payouts to their shareholders.

Dividend investing allows fund managers to create another stream of income other than returns from stock price appreciation.

This has been the investment strategy behind Security Bank’s dividend-focused UITF, the SB High Dividend Peso Equity Fund.

This peso-denominated non-index equity fund, launched in March 2014, invests in Philippine companies with high earnings growth potential, sound long-term fundamentals, and high dividend payouts.

This strategy has reaped benefits for Security Bank, helping the fund generate returns better than its benchmark, the PSEi.

The SB High Dividend Peso Equity Fund rose from a PHP 1.00 net asset value per unit (NAVPU) on March 10, 2014 to a record PHP 1.37 on February 6, 2015, delivering a 37% investment growth, almost double the 19% growth PSEi saw in the same period.

However, that initial run was cut short due to falling oil prices and economic slowdown in China. The fund fell 33% from its February 2015 peak to a low of PHP 0.91 in January 2016, underperforming the 20% shrinkage that the PSEi recorded over the same time frame.

A few months later, the fund recovered and rallied over two years. The fund climbed back to around PHP 1.32 in January 2018, generating a 45% investment growth in line with PSEi’s 46%.

Flash forward to today, because of the coronavirus-induced market downturn, the fund plunged to as low as PHP 0.71 before settling at PHP 0.92 as of June 22, 2020. Year to date, both the fund and the PSEi are down by 22% and 18%, respectively.

Looking at SB High Dividend Peso Equity Fund’s investments using as-reported metrics, it is not apparent that the fund invests in established and stable companies with profitable businesses.

As-reported metrics would have investors believe that this portfolio consists of companies that do not generate economic profit. However, Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the core non-financial holdings of SB High Dividend Peso Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most companies in this fund show as-reported ROAs that range around and below global cost-of-capital level, suggesting that they are not generating economic profit. However, Uniform Accounting reveals that these companies have strong returns, with Uniform ROA above the 6% global average returns except for PLDT Inc. (TEL:PHL).

The Uniform Accounting framework addresses financial statement inconsistencies attributable to the flaws present in the Philippine Financial Reporting Standards (PFRS). This enables investors to determine the true underlying performance of companies and avoid distorted financial analysis and valuation.

As such, it should not be surprising that when analyzing the non-financial holdings of SB High Dividend Peso Equity Fund, the figures that easily stand out are the double-digit discrepancies between Uniform ROA and as-reported ROA for these companies.

While at a glance, the difference between as-reported ROA and Uniform ROA may not seem that great, the distortion in percentage ranges from -43% to 197%, with Ayala Corporation (AC:PHL), JG Summit Holdings, Inc. (JGS:PHL), and SM Investments Corporation (SM:PHL) having distortions above a hundred percent.

As-reported ROA understates the profitability of AC, suggesting a below-average company with an as-reported ROA of 4%. In reality, this leading conglomerate is a high-quality firm with an 11% Uniform ROA, almost thrice the as-reported number. Over the past 15 years, AC has never seen its Uniform ROA dip below 10%.

Likewise, JGS is not a 4% ROA company like what as-reported numbers show. It is, in fact, an above-average company with an 8% Uniform ROA, consistently generating above-average returns over the past five years.

These companies rank among the top 20 Philippine companies in terms of market capitalization and have been generating Uniform ROA above global average returns over the past 5+ years. This suggests economic stability and profitability.

By focusing on as-reported metrics alone, Security Bank would never pick most of these companies because they look like anything but stable and profitable businesses.

That said, looking at profitability alone is insufficient to deliver superior investment returns. Investors should also identify if the market is significantly undervaluing the company’s earnings growth potential.

This table shows the earnings growth expectations for the major non-financial holdings of the fund. It features three key data points:

  1. The 2-year Uniform earnings per share (EPS) growth represents the Uniform earnings growth the company is likely to have for the next two years. The earnings number used is the value of when we convert consensus sell-side analyst estimates to the Uniform Accounting framework.
  2. The market expected Uniform EPS growth represents what the market thinks Uniform earnings growth is going to be for the next two years. Here, we show by how much the company needs to grow Uniform earnings in the next two years to justify the current stock price of the company. This is the market’s embedded expectations for Uniform earnings growth.
  3. The Uniform EPS growth spread is the difference between the 2-year Uniform EPS growth and market expected Uniform EPS growth.

On average, Philippine companies are expected to have 6% annual Uniform earnings growth over the next two years. Meanwhile, SB High Dividend Peso Equity Fund’s major holdings are forecast to underperform at just 1% projected Uniform earnings growth in the next two years.

Meanwhile, the market is seeing flat Uniform EPS growth for these firms in the next two years.

Among these companies, TEL and SM have the highest Uniform earnings growth dislocation.

The market is expecting TEL’s Uniform earnings to rise by 4%, but analysts are projecting a robust 32% earnings growth for the telecommunication company in the next two years.

Meanwhile, the market is pricing SM’s Uniform Earnings to plummet by 11% in the next two years. However, sell-side analysts are projecting the company’s earnings to accelerate by 11% moving forward.

Overall, as-reported numbers would have investors incorrectly conclude that this portfolio consists of low-quality companies. While these firms suffer from the adverse effects of the coronavirus pandemic, dragging down their short-term earnings growth expectations, Uniform Accounting metrics show that these companies are high quality with intact business models that would drive economic profitability moving forward.

SUMMARY and Puregold Price Club Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in SB High Dividend Peso Equity Fund—Puregold Price Club, Inc. (PGOLD:PHL).

As the Uniform Accounting tearsheet for PGOLD highlights, it trades at a Uniform P/E of 21.5x, around its historical averages and the global corporate average P/E.

Moderate P/Es require moderate EPS growth to sustain them. In the case of PGOLD, the company has recently shown a 5% growth in its Uniform EPS.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp on near-term financial forecasts like revenue and earnings.

We take sell-side forecasts for PFRS earnings as a starting point for our Uniform earnings forecasts. When we do this, PGOLD’s sell-side analyst-driven forecast shows that Uniform earnings will decline by 1% in 2019, before accelerating by 16% in 2020.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 45.40 per share. These are often referred to as market embedded expectations.

The company would have to see Uniform earnings expand by 4% in each of the next three years to meet current market valuation levels. Sell-side analysts’ expected 16% earnings growth for PGOLD is above what the current stock market valuation requires for 2020.

The company has an earning power above global corporate averages—based on its Uniform ROA calculation. Additionally, since the combination of the company’s cash flows and cash on hand consistently exceeds obligations over the coming years, PGOLD has a low dividend risk.

To conclude, PGOLD’s Uniform earnings growth is below peer averages. However, the company is trading below average peer valuations as well.

About the Philippine Market Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living oftentimes rely on professionals to manage their own investments within the scope of their investment policies.

With so many funds and managers out there, it can get confusing and difficult to decide which one best suits your needs as an investor.

Every Friday, we focus on one fund in the Philippines and take a deeper look into their current holdings. Using Uniform Accounting, we identify the high-quality stocks in their portfolio which may not be obvious using the as-reported numbers.

We also identify which holdings may be problematic for the fund’s returns that they would need to reconsider from a UAFRS perspective.

To wrap up the fund analysis, we highlight one of their largest holdings and focus on key metrics to watch out for, accessible in our tearsheets.

Hope you’ve found this week’s focus on SB High Dividend Peso Equity Fund interesting and insightful.

Stay tuned for next week’s Friday Uniform Portfolio Analytics!


Angelica Lim
Research Director
Philippine Markets Daily
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