A strong rise in the share price Australian Ethical is having an unexpected drag on profits.
The share price has jumped more than 40% in less than a month. Today it’s trading at $90. On May 19 it was $63.
That’s fine except for share performance rights sitting in its employee incentive scheme.
The cost to the environmental and socially responsible financial services company of these employee shares depends on the price when they vest at June 30.
If the current price holds up to the end of the financial year, that will mean about $460,000 less full year profit to be posted by Australian Ethical.
It also means that those employees in the scheme get a $460,000 windfall.
The latest earnings guidance for the year to June assumed a share price of $63.
If the share price is $90.50 at the end of June, that means a net profit of $3.27 million, or about $460,000 less than when the share price was $63.
And the reason the share price has risen so strongly is the bullish profit outlook.
On May 19, the day the shares took off, Australian Ethical Investment said it expected full year profit to jump about 86% to between $3.47 million and $3.84 million.
If the share price rises to $100, then the profits will fall by about $600,000 and the employee bonus will be greater.
It should be noted that Australian Ethical has changed its employee scheme so that the bottom line isn’t impacted by sudden share price movements.
The expense related to the new deferred share scheme is not affected by share price movements after the shares are placed into trust.