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Introduction to
Fundamental Analysis
- The Accounting Process
- Postulates and Principles
of Accounting
* Postulates of Accounting
* Principles of Accounting
- The Financial Statements
* The Balance Sheet
* The Income Statement
* The Cash Flow Statement
* Shareholders' Equity
Statement
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Shareholders Equity Statement
The statement of shareholders’ equity includes:
1)
The capital invested in a company.
2)
Retained earnings, which are the earnings or (losses) that have not
been distributed to the shareholders via dividends.
3)
Comprehensive income items.
The statement rolls forward the components of
shareholders’ equity from one year to the next, and discloses all changes
during the period. Adjustments to the income statement or the balance sheet
can affect shareholders’ equity. If, for example, assets are overstated,
the offset is ultimately equity. (The overstated assets get written down
(expensed), which then flows into retained earnings, a component of
shareholders’ equity.)
Investors need to be cautious if the ownership of
their company is being diluted in terms of dollars, as well as shares
outstanding. Comprehensive income items are mostly non-owner charges to
shareholders’ equity. These are mostly expenses, such as pension catch-up
adjustments, that the rule makers determined should be charged directly to
shareholders’ equity, and not the income statement. Executive and employee
stock options also dilute equity. Look for and be careful of a disconnect
(divergence) between the earnings of a company and its net worth. If equity
is being diluted, over time it will erode the stock price.
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Medtronic, Inc.
Summary of Shareholders’ Equity
($ in millions)
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Fiscal Yr.
2005 |
Fiscal Yr.
2004 |
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Common Stock |
$ 121.0 |
$ 120.9 |
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Retained
Earnings – Beginning Balance |
8,890.9 |
7,808.4 |
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Add: Net income |
1,803.9 |
1,959.3 |
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Less: Dividends |
(404.9) |
(351.5) |
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Less: Stock
repurchases |
(510.0) |
(878.8) |
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Add: C/s issued
for employee stock plans |
337.8 |
240.7 |
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Add: Tax
benefits on employee stock opt. |
60.8 |
55.4 |
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Add: C/s issued
for acquisition |
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57.4 |
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Retained
Earnings – Ending Balance |
10,178.5 |
8,890.9 |
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Other non-owner
charges in equity |
150.0 |
72.0 |
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Employee stock
ownership plan rec. |
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(6.8) |
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Total
Shareholders’ Equity |
$ 10,449.5
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$ 9,077.0
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Payout
Ratio: |
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Net Income |
$ 1,803.9 |
$ 1,959.3 |
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Payment to
shareholders: |
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Dividends |
404.9 |
351.5 |
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Stock
repurchases |
510.0 |
878.8 |
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Total payments
to shareholders |
914.9 |
1,230.3 |
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Payout Ratio |
50.72% |
62.79% |
The distinction between dividends and stock buybacks
is that dividends are distributed among all the common share owners, and are
more permanent and recurring in nature, making it harder for management to
reduce them. Stock buybacks, in contrast, are considered one time payments
to shareholders, leaving management in control of future cash flows.
Technically, buybacks increase the value of the remaining shares.
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