Advance Session Equity Management

1
Advance SessionEquity Management

• Can Oklahoma Cooperatives Afford to Pay Dividends
  on Invested Capital?
• Presenter
• Vern May
• CoBank
• 1-800-322-3654 EXT 02047

2
Traditional Cooperative Equity

• Low initial investment
• Equity created out of profit stream
• Long revolving periods
• No return on equity
• (negative return when time value of money is
  considered)
• Benefits through cash patronage and service

3
Challenges with Traditional Equity Structure

• Long revolving periods makes the cooperative
  unattractive to young producers
• Conflict between equity retirement and facility
  improvements

4
Could Cooperatives Pay Dividends on Invested
Equity

• Increase realized rate of return on investment
• Might make members less concerned over revolving
  period
• Might be appealing to young producers
• Would require cash

5
Data Used to Investigate the Feasibility of
Dividends on Equity

• Utilized CoBank data base of Oklahoma
  Cooperatives.
• Included data from 42 cooperatives in the State
  for years 2004 (22) and 2003 (20).

6
Typical CooperativeBalance Sheet

• 2004 2003
• Current Assets 2.962 2.296
• Current Liab. 2.059 1.438
• Total Assets 4.872 4.186
• Long Term Debt .397 .381
• Members Equity 2.415 2.367

7
Typical Cooperative Ratios

• Financial Ratios 2004 2003
• Current Ratio 1.44 1.60
• M.E./T.A. 49.5 56.5
• Leverage 16 16
• Working Capital .902 .858

8
Typical Cooperative Income Statement

• Operations 2004 2003
• Sales 12.026 11.388
• Margins 1.249 1.204
• Other Income .781 .765
• Gross Income 2.030 1.969

9
Typical Cooperative Bottom Line

• 2004 2003
• Expenses 1.844 1.866
• Local Profit .186 .103
• Net Income .245 (.313)

10
Typical Cooperative Profit Ratios

• 2004 2003
• Financial Ratios
• ROA 5.03 (7.49)
• ROE 10.14 (13.25)
• Labor/GI 43.5 45.3

11
Typical Cooperative Equity Profile

• Equity Section 2004 2003
• Common/Preferred St. .704 .765
• Allocated Equity .768 1.024
• Retained Earnings .943 .578
• Total Equity 2.415 2.367

12
Funds Required for Dividends on Equity

• Payment of 8 dividend on invested equities
  (Common or Preferred Stock)
• For 2004 would be an additional 56,320 of cash
  outlay.
• For 2003 would be an additional 61,200 of cash
  outlay.
• These are payments you are not making now.

13
Questions

• Could the typical cooperative afford an
  additional 50,000 to 60,000 cash drain?
• Would members be willing to extend the redemption
  period if they received dividends on invested
  equity?
• Would producers be willing to invest additional
  funds if a return on equity was offered?

14
Impact of Dividends on Equity

• The payment of dividends would impact all
  financial ratios.
• Balance sheet impact following profitable
  operations.

15
Impact of Profits on theBalance Sheet
Debt
Cash
Physical Assets
Allocated Equity
Unallocated Equity
Stock in Regional Cooperatives
16
Understanding Equity

• Allocated equity is stock or book credits that
  will be redeemed at a future date
• Unallocated equity is permanent capital that
  provides a cushion
• Warehouse bond prohibits elevators from carrying
  negative unallocated equity

17
Equity Management

• Equity Section 2004 2003
• Common/Preferred St. .704 .765
• Allocated Equity .768 1.024
• Retained Earnings .943 .578
• Total Equity 2.415 2.367

18
Simplified Income Chart
Cash Regional Dividends
Stock Regional Dividends
Non-member Income
Patronage Income
Net Savings
Dividend payment
Cash Patronage Dividend
Retaining Patronage Dividend
19
Equity Management

• The impact would be material to pay dividends on
  invested capital as it would impact the cash flow
  of the company.
• You would also need to identify any tax issues
• It is also necessary to examine the companies
  bylaws, state statutes, and seek assistance from
  legal and your accountant before making such a
  decision.

20
Equity Management

• CoBanks objective is to return 11 on capital
  invested in the bank.
• This is in the form of cash and allocated
  equities.
• No dividends are paid.

21
Equity Management

• Example
• CoBank stock investment 200,000
• If CoBanks objective is met you would receive
  22,000 in patronage back from the bank.
• You are provided a return on the investment in
  the bank.

22
Equity Management

• This provides a return to our customers and is
  not something you would obtain if funding with
  other financial institutions. Similar to your
  business.
• Our returns can be identified as a reduction in
  the interest paid which last year reduced your
  stated rate 84 BP.
• We operate under a Base Capital Program.
• This requires current users to capitalize the
  bank.

23
Equity Management

• The customer is provided market rates on interest
  and also obtain a return on their invested
  capital with out paying a dividend.
• Can your cooperative identify the type of return
  on the invested capital of the producer?
• Is the members needs satisfied?
• Is the investment he has in the cooperative
  retuning him an acceptable return?

24
Equity Management

• Summary
• Can you quantify for your customer base the type
  of returns he is getting on his investment rather
  then adding a dividend payout.
• A dividend payout will add an additional cash
  outlay that based on the numbers would impact
  cash flow.
• Utilize cash to begin a retirement program that
  can show a return to your member owners similar
  to what a dividend return would.

25
Equity Management

• If producer has investment of 5,000
• At a 11 return he would be getting 550 in
  patronage.
• Many times the producer is looking at services
  provided and not a return on his investment in
  the coop.
• This is a major challenge for cooperatives today
  and places more importance on remaining
  profitable.