A brief introduction

Delta Airlines initiated a shareholder cash return plan in its capital deployment strategy announced Wednesday, May 8. The carrier will be paying out a quarterly dividend of 6 cents a share beginning Sept. 10 for shareholders on record as of Aug. 9.

At the end of the first quarter, Delta had 855 million shares outstanding, and will be paying out dividends worth approximately $50 million every quarter or $200 million every year at the current payout rate. In addition, the carrier announced a share buyback program worth $500 million that ends in June 2016. Together, through these two channels, Delta plans to return over $1 billion to its shareholders over the next three years.

Accounting Effects

According to this estimation, there are several journal entries need to be recorded for dividends payments and stock repurchase.

Dr. Cash Dividend (-RE)               $200,000,000

Cr. Dividend Payable (+L)                $200,000,000

Dr. Dividend Payable (-L)             $200,000,000

Cr. Cash  (-A)                                    $200,000,000

(Dividend assumed to be paid next year)

Assume that Delta will buyback its stocks evenly next three years, so it needs to pay $500,000,000/3=$16,666,666.67 for stock repurchasing.

Dr.   Treasury Stock (-CC)            $16,666,666.67

Cr. Cash (-A)                                     $16,666,666.67

Reasons for Delta Capital-Return Plan

It is most probably that Delta wants to send out a positive message to investors. These developments send out a positive message to the investor community that Delta has sufficiently de-leveraged and therefore de-risked its balance sheet and that it sees stable earnings in the foreseeable future.

Dividends payment would less the Retained Earnings and stock repurchase would decrease the number of shares outstanding, thus it might boost the price by increase the market demand for its stock and can also increase the EPS, which can offset the diluted effect due to the dividend payment.

Public Concerns

However, Delta’s stock price plummet from $18.57 to $ 17.70 (4.68% decrease) on May 9th and just rebounded a little higher at $18.64 on May 16th, which reflects that the public suspend on the effect of its plan. 

It can affect its liquidity because a big chunk of free cash flow would be used for dividends payment and buybacks;

The cash paid plan would make Delta vulnerable to the market changes such as fuel prices increase and lower prices from competitors.

It has witnessed a volatile past and Delta’s stock price just recovered. Put forward such strategy can bring more uncertainty and risks for its future.

Given all these analyses, can Delta afford its plan to return capital? The airline will have to maintain stable operating cash flows to be able to make pension contributions and give cash back to shareholders.

Source:

http://blogs.wsj.com/cfo/2013/05/08/delta-capital-return-plan-puts-focus-on-cash-flow/

Many investors and financial analysts claim that Apple’s stock price is significantly undervalued. The stock price could be much higher if the company did not hold a significant amount of cash ($145 billion) on which it receives very low return. If the company used this cash to pay dividends instead, the shareholders could put this money to better use. Consequently, the stock price would increase.

There is  reason why Apple doesn’t want to return all the cash to shareholders. Significant parts of the cash (about two thirds) is held abroad in lower-tax jurisdictions. Thus, if Apple decides to pay dividends, it will need to transfer these funds to the United States and pay US taxes on this income. Instead, the company expects that there will be federal tax relief in the future and it will be possible to avoid this extra taxation.

The company has found a solution. For the first time in nearly two decades, Apple has issued bonds raising $17 billion. The bonds’ interest rates are almost as low as the interest on the debt of the United States Treasury. The funds from the bond issuance will help finance buying back the company stock and paying dividends to shareholders to the tune of $100 billion in total.

This decision helps Apple meet shareholder expectations while at the same time avoiding a potentially big tax hit. Since the announcement of the dividends, Apple stock price has risen by 10%.

Sources:

1) Unusual Moves in Confronting Apple’s Huge Pile of Cash, STEVEN M. DAVIDOFF, FEBRUARY 12, 2013, http://dealbook.nytimes.com/2013/02/12/unusual-moves-in-confronting-apples-mountain-of-cash/

2) To Satisfy Its Investors, Cash-Rich Apple Borrows Money, PETER LATTMAN AND PETER EAVIS, APRIL 30, 2013, http://dealbook.nytimes.com/2013/04/30/apple-raises-17-billion-in-record-debt-sale/

On Wednesday, Delta Airline announced a major turnaround. The company initiated dividend payout of roughly 1.35% annual yield and authorized $500M stock repurchase program or about 3% of its current market capitalization. The news highlights the improving condition of the airline industry as a whole. While many airlines are still struggling to return to profitability seen in the late 1990s when dividend payments and stock buybacks were common practice, recently several large air carriers have made similar moves. In an effort to return value to shareholders, Alaska Air Group authorized shares buyback and Southwest Airlines did both: initiated dividend payouts and share repurchases.

At an investor meeting in New York, Delta announced that it expects higher earnings capacity and improved cash flow. Recently, its chief executive also pointed out improved balance sheet and highlighted company’s debt that stood at $10B versus $17B just four years ago. The company plans to further reduce its debt burden and anticipates additional repurchase initiatives going forward.

While Delta shares have rallied 52% this year, the move failed to impress investors. The shares of the company were 5% lower the day after the announcement.  It is unclear whether other airlines will follow suit, but with the falling gas prices and improving US macro-economic data the future of the airline industry is looking brighter.

Source:

http://online.wsj.com/article/SB10001424127887324244304578470681886203740.html?KEYWORDS=buyback

We’ve all seen the headlines. Samsung is back and better than ever. Its cash and cash equivalents grew from approximately $22 billion in 2010 to 40 billion in 2013 with the help of its latest smartphone release, the Samsung’s Galaxy S4 in April 2013. Nothing left to do but celebrate right? You’re wrong. As the late rapper Biggie Smalls once said “the more money we come across the more problems we see”, and Samsung is no different.

Here is where the problem lies. As a stockholder in a company that has considerably increased its profits, I will undoubtedly seek a higher return on my investment in the form of an increase on dividends. We’ve seen this situation most recently with Apple shareholders. They began requesting an increase on dividends because Apple amassed a stockpile of $145 billion in retained earnings, while paying shareholders less than $3 per share.

With Apple’s news still fresh in the minds of Samsung investors, Samsung is now placed in a difficult position. Should they increase dividends that are currently “1% of the share price”, resume stock buybacks that haven’t occurred since 2007, acquire other companies, or focus on R&D for future projects.

According to an official at Samsung it is the latter. In prior years Samsung reinvested a significant amount of money in areas that would create future profits. Although their profits increased from 2011 to 2012, they kept spending relatively the same amount, approximately $16 billion on capital expenditures in both years. This has also contributed to their increase in Retained Earnings.

Hong Kong Based Analyst, Mark Newman predicts that Samsung will use their stockpile of cash for a large acquisition and stock buyback. I’m no expert but I do agree with Mr. Newman’s second prediction. If Samsung doesn’t want an Apple sized problem on its hands it better start showing shareholders the money.

Bibliography

• Wakabayashi, Daisuke, and Min-Jeong Lee. “Samsung’s Sweet Problem? Nearly $40 Billion in Cash.” Wall Street Journal [New York] 8 May 2013: B1+. Print.
• Svensson, Peter. “Apple to Dole out $100B to Shareholders.” Yahoo! News. Yahoo!, 23 Apr. 2013. Web. 08 May 2013.

This is an awesome way visualize every dollar coming into Apple and going out.

See the little developer payment in the lower right? That’s a billion right there. I stared at this for 20 minutes and am still in awe.

(Bigger version available here: http://imgur.com/fpGeLbd)

Here’s an article from valleywag.com, a Gawker product covering Silicon Valley, detailing what one poor sap happened to collect from his investment in Meez.com. Who would have thought that a business model consisting of paying for avatars and virtual coins could never sustain itself? (More after the entry)…

This Is What It Looks Like When You Lose All of Your Startup Money