Reading: Payout Ratios

SHARE REPURCHASES

Firms, especially listed ones. also frequently engage in share repurchases. The reason is that, for many shareholders, share repurchases are less heavily taxed than dividend payments.

The extent to which firms engage in share repurchases is recorded on the balance sheet. There, as part of the firms equity, we find the position "Treasury common stock shares." This position reflects the amount of money that was spent in the past to repurchase shares and therefore takes on a negative value.

In the case of Hershey, we see that the (negative) value of treasury shares increases by roughly 511 million in 2015, from 5'161.2 million at the beginning of the year to 5'672.4 at the end of the year. This implies that the firm has repurchased shares at a total cost of 511 million. These 511 million reflect cash that went from the firm to its shareholders. Economically, for the firm, it is equivalent to a dividend payment.

TOTAL PAYOUT RATIO

When combining share repurchases of 511 million with the dividend payments of 476 million (see previous section), we can assess the firm's total payout to its holders of common stock. In 2015, it was consequently 987 million.

Total payout = Cash dividends + Share repurchases = 476 + 511 = 987 million.

Given a net income of 513 million, the firm's total payout ratio was therefore 192%:

Total payout ratio = \( \frac{\text{Cash dividends + Share repurchases}}{\text{Net income}} = \frac{476 + 511}{513} \) = 192%.

Put differently, the firm has paid out almost twice as much as it has generated with its business. A closer look at the data reveals that the firm has borrowed money and liquidated some assets to pay be able to make these payments to the shareholders.