Understanding basic company financials

[scottie]

I'm trying to improve my understanding of company financials.

How can a company payout all of it's net profit (& more!) as dividends (payout ratio > 100) and still increase shareholders equity? I notice the number of shares is increasing ("shares outstand"), but "other income" is (almost) zero, so it can't be capital raising, right?

Aside: the company is ASX:WHF.

 

[finicky]

Confused me too, as not enough new share issuance for a cap raising at above book value to account for it..
Then saw it's some sort of LIC, so it would mean I guess that the unsold shares constituting its portfolio have increased in value. Although what kind of value? Share prices of the shares in which it invests, or their book values?
Or alternatively, possibly it accounts for shares sold at a profit and capital gain is not included in the LIC's earnings. Belli gave a complicated explanation of something like this once for LICs, can't remember the details. I had asked why LICs traded at such low Returns On Equity (ROE) yet people bought them and the explanation if I recall was something like capital gains on sales of stocks were not included. LICs are strange.

"Whitefield Industrials Limited (WHF, formerly Whitefield Limited) is an ASX listed investment company that seeks to build shareholder wealth through the delivery of reliable, cost-efficient outcomes. WHF invest in a portfolio of industrial (non-resource) shares listed on the Australian Stock Exchange."

 

[Value Collector]

I'm trying to improve my understanding of company financials.

How can a company payout all of it's net profit (& more!) as dividends (payout ratio > 100) and still increase shareholders equity? I notice the number of shares is increasing ("shares outstand"), but "other income" is (almost) zero, so it can't be capital raising, right?

Aside: the company is ASX:WHF.

View attachment 184014

No idea, this is not a company I follow, you would have to read through the notes, however it could be something along the lines some marketable securities they own increasing value but not being recorded in the earnings, I am not really sure. you could always write an email to the company and see if they reply.

 

[Bellcose]

I'm trying to improve my understanding of company financials.

How can a company payout all of it's net profit (& more!) as dividends (payout ratio > 100) and still increase shareholders equity? I notice the number of shares is increasing ("shares outstand"), but "other income" is (almost) zero, so it can't be capital raising, right?

I haven't gone back through previous year's Annual Reports but it seems dividends are being sourced from Retained Earnings.

 

[scottie]

Does this comment from the WHF 2024 annual report explain it?

 

[finicky]

@scottie, sure looks like it. Apparently they can take the market value of the shares they hold at end of financial year, minus tax payable if they had sold, and that is part of the LIC's book value (shareholders' equity). Seems reasonable.

 

[Bellcose]

@scottie, sure looks like it. Apparently they can take the market value of the shares they hold at end of financial year, minus tax payable if they had sold, and that is part of the LIC's book value (shareholders' equity). Seems reasonable.

It's contained in the Statement of Comprehensive Income where unrealised gains ($94.5m, tax $28.6m) are taken to equity and is also reflected in the Reserves in post #4.

 

[scottie]

Hey @finicky & @Bellcose , yes, I think you're right. They've got $66M of (after-tax) unrealised capital gains adding to the shareholder's equity but not reported as "other income" (in the financials given by the broker):



What's confusing me now is that they've paid out 117% as dividends but the cash balance has also gone up!

 

[Bellcose]

What's confusing me now is that they've paid out 117% as dividends but the cash balance has also gone up!

Well, yeah. As I indicated in post #4, the profit was added to Retained Earnings and dividends were also paid from that source.

Even more fun next annual report as 20% of the dividend paid after the end of financial year was from LIC capital gains - see Note 14(d) in the annual report. That component won't be reflected in the EPS by the way.

 

[divs4ever]

Confused me too, as not enough new share issuance for a cap raising at above book value to account for it..
Then saw it's some sort of LIC, so it would mean I guess that the unsold shares constituting its portfolio have increased in value. Although what kind of value? Share prices of the shares in which it invests, or their book values?
Or alternatively, possibly it accounts for shares sold at a profit and capital gain is not included in the LIC's earnings. Belli gave a complicated explanation of something like this once for LICs, can't remember the details. I had asked why LICs traded at such low Returns On Equity (ROE) yet people bought them and the explanation if I recall was something like capital gains on sales of stocks were not included. LICs are strange.

"Whitefield Industrials Limited (WHF, formerly Whitefield Limited) is an ASX listed investment company that seeks to build shareholder wealth through the delivery of reliable, cost-efficient outcomes. WHF invest in a portfolio of industrial (non-resource) shares listed on the Australian Stock Exchange."

i don't hold WHF , but from memory a useful amount of shareholders participate in their DRP

AND they have convertible preference shares ( maybe some of them converted )

and capital gains for a LIC last year wasn't so rare with all the M&A deals flying about

 

[Value Collector]

Does this comment from the WHF 2024 annual report explain it?

View attachment 184026

Yep that’s it

 

[Value Hunter]

earnings per share and cash flow per share are not so meaningful in the case of a LIC. For a LIC what really matters is changes in Book value per share over time combined with total dividends paid over time.

In the period referred to in the table you posted Book value per share increased from $4.70 to $5.27 that is a $0.57 increase. Dividends paid (excluding franking credits) totaled $1.911. Dividends plus growth in Book value = $2.481.

$2.481/$4.70 = 59% return for the total period.

Annualised return for the whole period = 4.75%

Although that is a simplified figure which does not take into account what would have happened if you reinvested dividends or what the franking credits where, etc.

But you can still see overall they did not exactly shoot the lights out.

Also Scottie if you are trying to learn about fundamentals I would not suggest starting with a LIC as they are atypical and many things work differently for them reporting wise and accounting wise, etc to a standard company. Not a good place to start as a beginner.

And to answer your question WHF throughout much of the period traded at prices above book value so they managed to do multiple share issues at prices above book value per share which means that book value per share could have increased despite dividends being higher than retained earnings.

 

[Value Collector]

earnings per share and cash flow per share are not so meaningful in the case of a LIC. For a LIC what really matters is changes in Book value per share over time combined with total dividends paid over time.

In the period referred to in the table you posted Book value per share increased from $4.70 to $5.27 that is a $0.57 increase. Dividends paid (excluding franking credits) totaled $1.911. Dividends plus growth in Book value = $2.481.

$2.481/$4.70 = 59% return for the total period.

Annualised return for the whole period = 4.75%

Although that is a simplified figure which does not take into account what would have happened if you reinvested dividends or what the franking credits where, etc.

But you can still see overall they did not exactly shoot the lights out.

Agreed, with the emphasis of “change in book value over time”, not day to day or week to week.

Also, One of the hidden benefits of LIC’s that does t show up on the balance sheet is the retained earnings at the companies they hold.

Eg, if they own CBA for example, the dividend flows through to their cashflow, but the retained earnings at CBA don’t show up.

 

[Value Hunter]

Also, One of the hidden benefits of LIC’s that does t show up on the balance sheet is the retained earnings at the companies they hold.

Eg, if they own CBA for example, the dividend flows through to their cashflow, but the retained earnings at CBA don’t show up.

Over the long term you would assume it generally shows up in an indirect way as retained earnings at CBA would eventually show up as higher EPS for CBA which eventually would show up as a higher share price for CBA which would eventually show up as higher book value for the LIC in question.

But I understand where you are coming from. You are referring to what Buffett described as "look through earnings"/"owners earnings".