Advance Session
Equity 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 Cooperative
Balance Sheet
Current Assets
 Current Liab.
 Total Assets
 Long Term Debt
 Members Equity

2004
2003
$2.962
$2.059
$4.872
$.397
$2.415
$2.296
$1.438
$4.186
$.381
$2.367
Typical Cooperative Ratios

Financial Ratios




Current Ratio
M.E./T.A.
Leverage
Working Capital
2004
2003
1.44
49.5%
16%
$.902
1.60
56.5%
16%
$.858
Typical Cooperative Income
Statement
Operations
 Sales
 Margins
 Other Income
 Gross Income

2004
$12.026
$1.249
$.781
$2.030
2003
$11.388
$1.204
$.765
$1.969
Typical Cooperative Bottom
Line
2004
Expenses
 Local Profit
 Net Income

$1.844
$.186
$.245
2003
$1.866
$.103
($.313)
Typical Cooperative Profit
Ratios
Financial Ratios
 ROA


ROE
Labor/GI
2004
2003
5.03%
10.14%
43.5%
(7.49%)
(13.25%)
45.3%
Typical Cooperative Equity
Profile

Equity Section




Common/Preferred St.
Allocated Equity
Retained Earnings
Total Equity
2004
2003
$.704
$.768
$.943
$2.415
$.765
$1.024
$.578
$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 the
Balance Sheet
Cash
Physical Assets
Stock in
Regional
Cooperatives
Debt
Allocated Equity
Unallocated
Equity
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




Common/Preferred St.
Allocated Equity
Retained Earnings
Total Equity
2004
2003
$.704
$.768
$.943
$2.415
$.765
$1.024
$.578
$2.367
Simplified Income Chart
Patronage
Income
Non-member
Income
Cash
Regional
Dividends
Stock
Regional
Dividends
Net
Savings
Cash
Patronage
Dividend
Retaining
Patronage
Dividend
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.