Investing in stocks is, of course, more art than science. In fact, brokerages and financial advisors go out of their way to warn of the risks involved in any investment in order to protect their licenses and professional reputations. That said, there is most often some degree of expectation on the part of the stock buyer that the purchase will end up with a financial return.
The lion's share of that return is paid out in dividends, i.e. allocations of a company's profits to shareholders, either in cash or in additional shares of stock. So, what is left in cash flow besides dividends? There is a way to determine this.
More on Dividends
Only publicly listed companies pay dividends to investors as a premium for their stake in the enterprise. These distributions are disbursed in amounts and on a schedule set by the company's board of directors.
Yet some companies pay no dividends at all, opting instead to re-dedicate their earnings back into the corporation. Furthermore, dividends can be paid by other investment entities, like mutual funds and exchange-traded funds (or ETFs). What a company does not pay out in dividends is preserved by the company as "retained earnings."
Read More: How to Calculate Monthly Dividends
Starting With Important Financial Statements
To identify total operating cash flow (OCF), it is helpful to obtain an income statement. Beginning with revenues, the income statement then factors in costs and other expenses to arrive at EBIT, earnings before interest and taxes. Subtracting interest from EBIT arrives at taxable income, removing taxes leaves us with the net income.
A balance sheet is also important for the calculation. This document is a report of assets, liabilities and, most important, stockholders' equity. The all-important equation to remember when analyzing a balance sheet is assets = liabilities + shareholders' equity.
Finally, a cash flow statement will demonstrate how assets are coming and going for a company.
Determining Stockholders' Cash Flow
First, find the net income on the income statement. For the purpose of example, say the company's net income is $150,000.
From there, look at the cash flow statement, toward the bottom, for the category of "Cash Flow from Financing Activities." Within that category will be a line item for dividends paid. Again as an example, the company raised $25,000 in stock issues and paid out $10,000 in dividends. Then, locate the shareholders' equity on the balance sheet and subtract from that the net income.
In our example, equity is $230,000. So, subtracting $150,000 from $230,000 is $80,000. Adding back the dividends yields $90,000.
The cash flow statement tells us that the issuing proceeds come to $25,000, subtract this from the $90,000 for $65,000, the beginning stockholders' equity. Subtracting this figure from the shareholders' equity on the balance sheet, and subtracting that difference from zero (representing zero dividends), gives you the first factor of the main equation.
Read More: Cash Flow vs. Cash Position
Additional Paid-In Capital
The second factor is the capital surplus, which appears on the balance sheet as "additional paid-in capital." This is how much of a company's shareholders' earnings are not related to retained earnings. Subtract the second from the first factor.
Subsequently, add this difference to the Treasury stock value, also on the balance sheet. The resulting sum is the cash flow to stockholders without dividends paid. Using a cash flow to owners formula helps investors to understand how much or how little the dividends contribute to their overall portfolio.
Knowing the weight of dividends in financial assets helps stockholders to know when to sell and buy. Since dividends are proposed as an enticement to hold stock, knowing how much difference they make significantly informs the decision-making process.
Read More: Advantages & Disadvantages of Paying Cash Dividends
References
Writer Bio
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.