(06-08-2014, 02:16 PM)Stecano Wrote: [ -> ] (06-08-2014, 12:24 PM)specuvestor Wrote: [ -> ]Starhub has negative consolidated reserve due to goodwill in SCV. That's why on a holding company basis it looks ok.
Since our discussion below, IMHO it is clear the moat is slowly but surely eroding.
On cashflow basis we also have to be very careful as the dividend payment depends on no surprises on the FCF as it is very tight so no margin of error. Stecano should also understand that FCF is different from Earnings.
Yes I'm learning that FCF is different from earnings. Indeed I'm glad I came across this website and learn from many of the helpful folks here.
Interesting though, if I use FCF instead of earnings, this is going to be even more stressful for Starhub as their DPS is higher than FCF and could be in that state from 2009 to 2013. That makes me wonder how long can their share price maintain. It is getting more and more difficult for them to keep up with their high dividends. And if they stick to it without growing their income, their retained earnings is going to continue to get worse.
Retained Earnings is a very tricky item to look at by itself only.
Why? Here's why:-
Retained Earnings on the Balance Sheet
Investing Lesson 3 - Analyzing a Balance Sheet
Joshua Kennon
When a company generates a profit, management has one of two choices: They can either pay it out to shareholders as a cash dividend, or retain the earnings and reinvest them in the business. That reinvestment may be used to fund acquisitions, build new factories, increase inventory levels, establish larger cash reserves, reduce long-term debt, hire more employees, start a new division, research and develop new products, buy common stock in other businesses, purchase equipment to increase productivity, or a host of other potential uses.
When the executives decide that earnings should be retained, they have to account for them on the balance sheet under shareholder equity. This allows investors to see how much money has been put into the business over the years. Once you learn to read the income statement, you can use the retained earnings figure to make a decision on how wisely management is deploying and investing the shareholders' money. If you notice a company is plowing all of its earnings back into itself and isn't experiencing exceptionally high growth, you can be sure that the stock holders would be better served if the board of directors declared a dividend.
Ultimately, the goal for any successful management is to create $1 in market value for every $1 of retained earnings. Any business that insisted upon keeping the profit that belonged to you, the owner, without ever sending funds to you in the form of a dividend or increasing your own wealth through higher capital gains is not going to have much utility. Investing is about putting out money today for more money in the future. No rational personal would continue to hold a stake in a corporation that never permitted any of the rewards to flow through to the stockholder.
Retained Earnings Examples from Real Companies
Let's look at an example of retained earnings on the balance sheet:
• Microsoft has retained $18.9 billion in earning over the years. It has over 2.5 times that amount in stockholder equity ($47.29 billion), no debt, and earned over 12.57% on its equity last year. Obviously, the company is using the shareholder's money very effectively. With a market cap of $314 billion, the software giant has done an amazing job.
• Lear Corporation is a company that creates automotive interiors and electrical components for everyone from General Motors to BWM. As of 2001, the company had retained over $1 billion in earnings and had a negative tangible asset value of $1.67 billion dollars! It had a return on equity of 2.16%, which is less than a passbook savings account. The company is astronomically priced at 79.01 times earnings and has a market cap of $2.67 billion. In other words: Shareholders have reinvested a billion dollars of their money back into the company and what have they gotten? They owe $1.67 billion.1 That is a bad investment.
The Lear example deserves a closer look. It is immediately apparent that shareholders would have been better off had the company paid out its earnings as dividends. Unfortunately, the economics of the company are so bad had the profits been paid out, the business probably would have gone bankrupt. The earnings are reinvested at a sub par rate of return. An investor would earn more on the earnings by putting them in a CD or money market fund then by reinvesting them into the business.
1) You may be wondering how the company has a supposed book value of $23.77 per share, and yet the shareholders owe a billion and a half dollars. If you look at Lear's balance sheet, you will notice it shows shareholder equity of $1.6 billion and tangible assets of -1.665 billion. This doesn't look as horrible as it is until you discover $3.27 billion of the assets on the company's balance sheet consist of goodwill. The shareholders' equity is being inflated by the goodwill figure - without it, the shareholders are left owing money to the company's creditors.
NB:-
So until someone does a complete analysis of STAR HUP what is the use at looking at the retained earning of STAR HUP or any company for that matter?
Additional:-
Is Retained Earnings real cash (balance)?
Retained earnings are the sum of a company's profits, after dividend payments, since the company's inception. They are also called earned surplus, retained capital, or accumulated earnings.
How it works/Example:
Let's assume Company XYZ has been around for five years. During this time, it reported the following net income:
Year 1: $10,000
Year 2: $5,000
Year 3: -$5,000
Year 4: $1,000
Year 5: -$3,000
Assuming Company XYZ paid no dividends during this time, XYZ's retained earnings equal the sum of its net profits since inception, or in this case, $8,000. In subsequent years, XYZ's retained earnings will change by the amount of each year's net income, less dividends.
The retained earnings statement summarizes changes in retained earnings for a fiscal period, and total retained earnings appear in the shareholders' equity portion of the balance sheet. This means that every dollar of retained earnings means another dollar of shareholders' equity or net worth.
A company's board of directors may appropriate some or all of the company's retained earnings when it wants to restrict dividend distributions to shareholders. Appropriations are usually done at the board's discretion, although bondholders and other circumstances may contractually require the board to do so. Appropriations appear as a special account in the retained earnings section. When an appropriation is no longer needed, it is transferred back to retained earnings. Because retained earnings are not cash, a company may fund appropriations by setting aside cash or marketable securities for the projects indicated in the appropriation.
Why it Matters:
It is important to understand that retained earnings do not represent surplus cash or cash left over after the payment of dividends. Rather, retained earnings demonstrate what a company did with its profits; they are the amount of profit the company has reinvested in the business since its inception. These reinvestments are either asset purchases or liability reductions.
Retained earnings somewhat reflect a company's dividend policy, because they reflect a company's decision to either reinvest profits or pay them out to shareholders. Ultimately, most analyses of retained earnings focus on evaluating which action generated or would generate the highest return for the shareholders.
Most of these analyses involve comparing retained earnings per share to profit per share over a specific period, or they compare the amount of capital retained to the change in share price during that time. Both of these methods attempt to measure the return management generated on the profits it plowed back into the business. Look-through earnings, a method that accounts for taxes and was developed by Warren Buffett, is also used in this vein.
Capital-intensive industries and growing industries tend to retain more of their earnings than other industries because they require more asset investment just to operate. Also, because retained earnings represent the sum of profits less dividends since inception, older companies may report significantly higher retained earnings than identical younger ones. This is why comparison of retained earnings is difficult but generally most meaningful among companies of the same age and within the same industry, and the definition of "high" or "low" retained earnings should be made within this context.
Hope the article is informative and enjoyable.
Shalom.