Advance SessionEquity Management

Can Oklahoma Cooperatives Afford to Pay Dividends on Invested Capital?

Presenter: Vern May CoBank 1-800-322-3654 EXT 02047

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

Challenges with Traditional Equity

Structure Long revolving periods makes the

cooperative unattractive to young producers

Conflict between equity retirement and facility improvements

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

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).

Typical CooperativeBalance Sheet

20042003

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

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

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

Typical Cooperative Bottom Line

2004 2003

Expenses $1.844 $1.866 Local Profit $.186 $.103 Net Income $.245 ($.313)

Typical Cooperative Profit Ratios

2004 2003

Financial Ratios ROA 5.03% (7.49%) ROE 10.14% (13.25%) Labor/GI 43.5% 45.3%

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

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.

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?

Impact of Dividends on Equity

The payment of dividends would impact all financial ratios.

Balance sheet impact following profitable operations.

Impact of Profits on theBalance Sheet

Physical Assets

Stock in RegionalCooperatives

Debt

Allocated Equity

Unallocated Equity

Cash

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

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

Simplified Income Chart

PatronageIncome

Non-memberIncome

Net Net SavingsSavings

CashPatronageDividend

RetainingPatronage Dividend

CashRegionalDividends

StockRegionalDividends

Divide

nd pa

ymen

t

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.

Equity Management

CoBank’s 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.

Equity Management

Example CoBank stock investment $200,000 If CoBank’s 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.

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.

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?

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.