Do Corporate Profits Produce the Right Stockholder Dividends?

by Fred Siegmund

Corporate Profits

This is the season when most of America’s corporations send their shareholders notice of the company’s annual meeting along with the 10-K report.

The 10-K reports and the information in them are required as part of their corporate charter, although the companies often write additional summaries with lots of charts and photographs to highlight their good performance (or put a good face on their bad performance).

Take Exxon Mobil. In their 2008 report, they cite record earnings of $45.2 billion and a profit rate of 34.2%, figured as the ratio of net income to stockholders equity.

Profit rates were also above 30% in the three years from 2005 to 2007, so the 34.2% rate in 2008 could reasonably be thought of as a little better than a typical year.

Stock Prices, Dividends and Cash Flow

But, the news of record profits came in the middle of the worst recession in more than 20 years. For Exxon Mobil stockholders, it was an off year. Stock prices dropped from over $90 a share to just under $80 by year’s end.

Dividends per share were $1.55 for the year. Using the share price earlier in the year of $96.12, which was the year’s high, the rate of return for stockholders was 1.6%, a.k.a. the yield. By year’s end, with the stock price down to $79.83, the rate of return jumped to 2%.

In the cash flow section of the 10k report, the $45.2 billion was right at the top. Looking down the page at cash flows for operating activities, investing activities and financial activities, the largest use of cash was $35 billion for an item labeled common stock acquired.

Only a little over $8 billion went to dividends.

The cash flow page shows ExxonMobil started the year with $33.9 billion of cash or cash equivalents. The same cash flow page includes $19.3 billion for additions to property, plant and equipment.

However, they could have made these purchases from existing cash without an additional penny from the new profits of $45.2 billion.

ExxonMobil ended the year with $31.4 billion of cash or cash equivalents. Using the figure in the report for number of common shares outstanding and dividing into the cash, I find ExxonMobil has $6.10 cash for each share of stock, and $8.78 of current profits for each share of stock.

But How Did Stockholders Do?

Despite the record profits, stockholders got only $1.55 a share in dividends, representing a 2% return and every single stock holder made a capital loss on the year.

ExxonMobil only used $19.3 billion of $33.4 billion of starting cash and $45.2 billion more of new profits to maintain or expand its physical plant and facilities.

It is sobering to me that record profits do not bring a better yield. But ask yourself: “Can I make a good return in stocks without selling when I have a capital gain?”

More and more the answer appears to be no.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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