What happens to company 's profit?

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peter1a
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What happens to company 's profit?

Post by peter1a » Fri Feb 10, 2017 3:19 pm

Beginner question about publicly traded companies.

What happens to net income or profit at the end of a certain period (quarter or a year).?
How can an person who owes the companies shares get their profit out?
Is it distributed equally to the shareholders or reflected in the price of their shares?

Let say a XYZ publicly traded company has 10mil $ profit ,sitting in their accounts, can a majority holder withdraw a certain % from the company's account if it is approved by other members ?

Thank you.

centrifuge41
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Re: What happens to company 's profit?

Post by centrifuge41 » Fri Feb 10, 2017 3:23 pm

A dividend could get voted on and approved.

The company could sit on a hoard of cash, in which case the market value includes that cash.

The company could reinvest the (operating) profits, and seek new markets & earnings.

Jack FFR1846
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Re: What happens to company 's profit?

Post by Jack FFR1846 » Fri Feb 10, 2017 3:25 pm

The company might pay a dividend. They may sit on the money. They may buy back shares. They might acquire another company. They might develop a new product, build new manufacturing, buy new machines, pay executives huge payouts. They could increase employee 401k matching (this happened for me today. Matching is voted on quarterly based on financial results). If the money is sitting outside the US, it will likely just sit there and do nothing. I suppose if you bought 51% of the company shares, you could demand that the company pay out some amount in dividends or as majority owner, you'd fire the board and bring on those who would agree with you.
Bogle: Smart Beta is stupid

bigred77
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Re: What happens to company 's profit?

Post by bigred77 » Fri Feb 10, 2017 3:37 pm

For publicly traded companies:

Net income (minus dividends and stock buybacks) from the income statement will flow directly into retained earnings on a company's balance sheet.

Stock holders have company's profits directly returned to them only through management's discretion (dividends). Other alternatives for those profits are stock buybacks (benefit's shareholders by increasing share prices), reinvesting in the business (capex), paying down debt, holding cash on the books for future use, M&A activity, etc. The only way for shareholders to acquire cash is via dividend payments or selling their (hopefully) appreciated shares.

Just as an FYI... Net Income can be deceiving. Net Income is an accounting number and needs to be adjusted for non-cash items that go into that number . The statement of cashflows will probably be a better indication of how much cash "profit" a company is generating. Especially cash flows from operating activities.

Valuethinker
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Re: What happens to company 's profit?

Post by Valuethinker » Sat Feb 11, 2017 1:47 pm

peter1a wrote:Beginner question about publicly traded companies.

What happens to net income or profit at the end of a certain period (quarter or a year).?
How can an person who owes the companies shares get their profit out?
Is it distributed equally to the shareholders or reflected in the price of their shares?

Let say a XYZ publicly traded company has 10mil $ profit ,sitting in their accounts, can a majority holder withdraw a certain % from the company's account if it is approved by other members ?

Thank you.


The other answers are all good.

To try to address the last question. If you control a company, you can convene a meeting of the shareholders, where they vote to receive a dividend. Or to use the cash to buyback shares (Warren Buffett & Berkshire Hathaway never pay a dividend, and it's worth looking up his argument why buybacks are better but also equivalent).

If a company has $10m in its Retained Earnings account (under Equity on the Balance Sheet) then, usually, the max it can pay out to investors is $10m (legally). At least that's the case in UK law, and I believe in US law.

Note that because of accrual accounting you could have a situation where the company has $10m under Ret E, but no cash-- eg if the customers have not paid the company yet, that money is sitting in Accounts Receivable (current assets) not cash. So then the company would have to borrow $10m to pay the dividend. It's usually not clever for companies to pay out dividends where they have not received the cash- -but, for example, many oil &gas companies were doing precisely that (dividends + share buybacks + capex > net cash flow).

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bogleblitz
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Re: What happens to company 's profit?

Post by bogleblitz » Sat Feb 11, 2017 1:55 pm

This is a very good question.

Using apple.com as an example. Apple makes lots of money on iPhones every year. I think last I heard, Apple is sitting on $216 billion cash in the bank. I wonder if apple gives out dividends or do some buybacks.

TravelGeek
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Re: What happens to company 's profit?

Post by TravelGeek » Sat Feb 11, 2017 5:45 pm

bogleblitz wrote:This is a very good question.

Using apple.com as an example. Apple makes lots of money on iPhones every year. I think last I heard, Apple is sitting on $216 billion cash in the bank. I wonder if apple gives out dividends or do some buybacks.


Dividend history: http://investor.apple.com/dividends.cfm

Gropes & Ray
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Re: What happens to company 's profit?

Post by Gropes & Ray » Sat Feb 11, 2017 6:38 pm

peter1a wrote:Beginner question about publicly traded companies.

What happens to net income or profit at the end of a certain period (quarter or a year).? At the end of the year it is taxed. Distributions are at the discretion of the board.
How can an person who owes the companies shares get their profit out? Most likely by selling stock. Or you can convince the board to declare a dividend.
Is it distributed equally to the shareholders or reflected in the price of their shares? Yes to both. Dividends are equal per share. If a company does not distribute profits, the share price will reflect retained earning.

Let say a XYZ publicly traded company has 10mil $ profit ,sitting in their accounts, can a majority holder withdraw a certain % from the company's account if it is approved by other members ? No but a majority shareholder can probably control the board.

Thank you.


There are minor exceptions to everything, and these answers don't always apply to closely held corps or LLCs.

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Phineas J. Whoopee
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Re: What happens to company 's profit?

Post by Phineas J. Whoopee » Sat Feb 11, 2017 7:42 pm

Valuethinker wrote:...
If a company has $10m in its Retained Earnings account (under Equity on the Balance Sheet) then, usually, the max it can pay out to investors is $10m (legally). At least that's the case in UK law, and I believe in US law.
...

Not at all in the US. It is legal, and not especially uncommon (which isn't to say a majority of publicly-traded companies do it each year) to borrow money for the express purpose of distributing it to shareholders. One method is called dividend recapitalization, but others exist. Every dividend changes the capital structure of the corporation, so it is interesting, but not entirely fair, to call dividend recapitalization out from the others.

The entire topic is a subset of Corporate Actions, "corax."

PJW

Valuethinker
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Re: What happens to company 's profit?

Post by Valuethinker » Sun Feb 12, 2017 8:59 am

Phineas J. Whoopee wrote:
Valuethinker wrote:...
If a company has $10m in its Retained Earnings account (under Equity on the Balance Sheet) then, usually, the max it can pay out to investors is $10m (legally). At least that's the case in UK law, and I believe in US law.
...

Not at all in the US. It is legal, and not especially uncommon (which isn't to say a majority of publicly-traded companies do it each year) to borrow money for the express purpose of distributing it to shareholders. One method is called dividend recapitalization, but others exist. Every dividend changes the capital structure of the corporation, so it is interesting, but not entirely fair, to call dividend recapitalization out from the others.

The entire topic is a subset of Corporate Actions, "corax."

PJW


Note a UK company can also borrow money to pay a dividend/ do buybacks.

That's affecting the cash (current asset) side of the balance sheet.

However the restriction in the UK applies to the *Equity* portion of the balance sheet. Retained earnings/ profits has to be at least equal to the dividend being paid.

http://www.farrer.co.uk/News/Briefings/ ... reholders/

Googling around, this says the US situation is similar?

https://www.fool.com/knowledge-center/c ... arnin.aspx

But companies aren't always allowed to continue making dividend payments. If a company no longer has any retained earnings on its balance sheet, then it typically can't pay dividends except in extraordinary circumstances.


Finally, there is one situation in which a company can pay a dividend even with negative retained earnings. If the company is wrapping up its operations, then it can make dissolution or liquidation dividend payments to shareholders regardless of the condition of its balance sheet.

Still, in the vast majority of cases, companies can't pay dividends that exceed their retained earnings.


This exception would also apply in the UK.

In a "leveraged recapitalization" a Newco (SPV) acquires the company, thus realizing cash for existing investors (who own similar stakes in the Newco, but it is encumbered with more debt). Is that the same as a dividend recapitalization?

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Phineas J. Whoopee
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Re: What happens to company 's profit?

Post by Phineas J. Whoopee » Sun Feb 12, 2017 3:26 pm

Thanks for the additional commentary, Valuethinker.

Valuethinker wrote:...
In a "leveraged recapitalization" a Newco (SPV) acquires the company, thus realizing cash for existing investors (who own similar stakes in the Newco, but it is encumbered with more debt). Is that the same as a dividend recapitalization?

I looked it up, and I'm pretty sure it isn't the same, but it certainly makes the Special Purpose Vehicle more leveraged.

Maybe a Boglehead CPA or Chartered Accountant will chime in. I think I'm starting to get out of my depth on this topic.

PJW

bigred77
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Re: What happens to company 's profit?

Post by bigred77 » Sun Feb 12, 2017 6:15 pm

Phineas J. Whoopee wrote:Thanks for the additional commentary, Valuethinker.

Valuethinker wrote:...
In a "leveraged recapitalization" a Newco (SPV) acquires the company, thus realizing cash for existing investors (who own similar stakes in the Newco, but it is encumbered with more debt). Is that the same as a dividend recapitalization?

I looked it up, and I'm pretty sure it isn't the same, but it certainly makes the Special Purpose Vehicle more leveraged.

Maybe a Boglehead CPA or Chartered Accountant will chime in. I think I'm starting to get out of my depth on this topic.

PJW


My understanding of a leveraged recap is that it is typically used in the Private Equity world. It would be fairly uncommon to see this in the world of publicly traded companies unless the company is being taken private.

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