myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes): Return on Retained Capital Illustrated by Various Companies

Company A:

In 1989, earned $1.16 per share.
Between the end of 1989 and the end of 1999:

total earnings were $17.14 a share,
total dividends were $9.34 a share and
retained earnings were $7.80 per share ($17.14 - $9.34 = $7.80) to add to its equity base.
company's per share earnings increased from $1.16 to $2.56.

Interpretations:

We can attribute the 1989 earnings of $1.16 per share to all the capital invested and retained in the company up to the end of 1989.
We can also argue that the increase in earnings from $1.16 a share in 1989 to $2.56 a share in 2000 was due to the company's durable competitive advantage and management's doing an excellent job of investing the $7.80 a share in earnings that the company retained between 1989 and 1999.
If we subtract the 1989 per share earnings of $1.16 from the 1999 per share earnings of $2.56, the difference is $1.40 a share.
Thus, we can argue that the $7.80 a share retained between 1989 and 1999 produced $1.40 a share in additional income from 1999, for a total return of retained capital of 17.9% ($1.40 / $7.80 = 17.9%).

Company B

In 1990, earned $1 per share.

Between the end of 1990 and the end of 2000:

total earnings were $20.12 a share,
total dividends were $10.57 a share and
retained earnings were $9.55 per share ($20.12 - $10.57 = $9.55) to add to its equity base.
the company's per share earnings increased from $1 a share to $2.90.

Interpretations:

We can attribute the 1990 earnings of $1 per share to all the capital invested and retained in the company up to the end of 1990.
We can also argue that the increase in earnings from $1 a share in 1990 to $2.90 a share in 2000 was due to the company's durable competitive advantage and management's doing an excellent job of investing the $9.55 a share in earnings that the company retained between 1990 and 2000.
If we subtract the 1990 per share earnings of $1 from the 2000 per share earnings of $2.90, the difference is $1.90 a share.
Thus, we can argue that the $9.55 a share retained between 1990 and 2000 produced $1.90 a share in additional income from 1990, for a total return on retained capital of 19.9% ($1.90 / $9.55 = 19.9%).

Company C

In 1990, earned $42.96 per share.

Between the end of 1990 and the end of 2000:

total earnings were $42.96 a share,
total dividends were $10.30 a share and
retained earnings were $32.66 per share ($42.96 - $10.30 = $32.66) to add to its equity base.
the company's per share earnings increased from $6.33 a share to $8.50.

Interpretations:

This company kept $32.66 per shae of shareholders' earnings and allocated it so that per share earnings increased by $2.17.
This equates to a return on retained capital of 6.6% ($2.17 / $32.66 = 6.6%).
This is about what you would have earned had you left it in the bank.

Company D

In 1990, earned $0.82 per share.

Between the end of 1990 and the end of 2000:

total earnings were $4.93 a share,
total dividends were $0.80 a share and
retained earnings were $4.13 per share ($4.93 - $0.80 = $4.13) to add to its equity base.
the company's per share earnings had total losses of $7.48 a share.

Interpretations:

This means that management had to spend $7.48 a share in additional sums that they either borrowed or took from earnings retained during prior years.
Since this $7.48 in shareholder capital was depleted, rather than paid out as a dividend, this is added to the $4.13 in retained earnings, giving a total of $11.61 a share that was kept from shareholders.
Between 1990 and 2000, the company's per share earnings decreased from $0.82 a share to $0.25 a share. We can argue that the decrease in earnings was caused by the company being a price-competitive business that sucks up capital but does nothing to increase shareholders' wealth.
If we subtract the 1990 per share earnings of $0.82 from the 2000 per share earnings of $0.25 , the difference is a negative $0.57 a share.
Thus we can argue that the $4.13 a share retained between 1990 and 2000 and the $7.48 depleted during this period produced zero additional income.
The company is in a tough business (steel) in which to develop a competitive advantage.

Company A: H&R BLOCK

Company B: WM. WRIGLEY JR. COMPANY

Company C: GENERAL MOTORS

Company D: BETHLEHEM STEEL

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