A study of more than three dozen leading companies on the Indonesia Stock Exchange has revealed a 36 percent increase in the retention of earnings as they opt to finance future expansion rather than pay dividends.
The research by Investor Daily found that these 37 companies collectively retained Rp 83.1 trillion ($8.8 billion) of their 2011 earnings, up 36 percent from the Rp 61.2 trillion retained the previous year.
“As listed companies have predicted uncertainty this year, they are anticipating it by saving, rather than seeking debt,” said Satrio Utomo, the research head of Universal Broker Indonesia.
He added that increasing the size of the retained earnings would help companies cope with fluctuations in the financial market, including the rupiah.
The 37 companies are part of the LQ-45, a basket of 45 of the most valuable companies listed on the Jakarta bourse. The companies in the sample were those that have undertaken shareholder annual general meetings so far this year.
An increase in retained earnings can come about through an increase in a company’s net income, a reduction in dividend payments or a combination of the two.
The 37 listed companies booked a total of Rp 156.5 trillion in net income last year, up 24 percent from 2010’s Rp 126 trillion.
Bank Rakyat Indonesia, the nation’s second-largest lender by assets, was the listed company with the largest volume of retained earnings in 2011. Shareholders approved the retention of 75 percent of its 2011 net income, meaning the bank booked Rp 11.3 trillion in retained earnings. This proportion was higher than in 2010, when retained earnings was 73.5 percent.
Many Indonesian companies learned tough lessons from the 1997-98 Asian financial crisis, when the rupiah depreciated by almost 70 percent. Many that had bank loans, especially ones denominated in dollars, went into default.
Also contributing to the rising preference for retained earnings is that obtaining funds through bank loans is more costly than using a company’s existing funds.
Adityawarman, president director of state-controlled toll road operator Jasa Marga, said increasing retained earnings meant the company could expand aggressively.
The company plans to add capital to its nine subsidiaries, which operate toll roads. In previous years, Jasa Marga used to obtain 70 percent of project funding from bank loans, while the remainder came from internal cash. With an increase in retained earnings, the debt proportion can be cut.
Gatot M. Suwondo, president director of state-controlled lender Bank Negara Indonesia, said retained earnings from 2011 net income could help the bank book an 18 percent to 20 percent increase in outstanding loans this year.