The pharmaceutical sector is well known for paying out large dividends. These fat payouts leave meagre retained earnings (net profits less dividends), at least, compared to most sectors. Accordingly it would be interesting to see how returns on retained earnings vary within the sector.
All five stocks are trading on the NYSE however AstraZeneca also trades, on my side of the pond, in London.
Business wisdom says that if a company has a large return on retained earnings, and it can put all of those earnings to use, then no dividend should be paid out as presumably those earnings are put to best use by reinvestment in the company.
Alternatively if returns on retained earnings are poor, or negative, then almost all earnings should be returned to shareholders whom are then free to reinvest their cash at higher returns.
The following table details the return on retained earnings as well as the dividend yield for the current year. The information needed to calculate the return on retained earnings was taken from www.digitallook.com. The historic period covered was 5 years and the figures may contain exceptional items.
A big surprise is JNJ which only returned 9% on retained earnings. JNJ also pays out the lowest yield of the five examples.
LLY has a monstrous return on retained earnings. Over the period LLY earned 903c per share and paid out 878c per share in dividends.
Note that LLY took a loss in 2008 which skewed the figures somewhat. If LLY broke even in 2008 then the Return on retained earnings would have been 99%. If EPS would have been, say, 290c in 2008 then LLY would have had a return on retained earnings of 42%.
To calculate return on retained earnings pick a company then simply add up the annual EPS, as well as the dividend per share paid out, for a specific period ( i.e. 5 years or 10 being to most common ). Then subtract the total dividends per share for the period from the total EPS for that period. So for JNJ total EPS over the 5 years covered was 1988c and total dividends per share paid out was 807.5c. Therefore subtracting the dividends from earnings (1988c less 807.5c) gives us 1180.5c of retained earnings.
The next step involves looking at the companies historic EPS again. Subtract the first year EPS from the final year EPS. Again, looking at JNJ we see it earned 338c in 2005 and 445c in 2009 (Digitallook.com obviously have not updated JNJ’s figures). So 445c less 338c equals 107c.
We then divide the 107c by the retained earnings of 1180.5c and multiply the answer by 100 which gives us 9.06%.
Return on retained earnings is a favourite measuring stick of Warren Buffett’s and is best combined with other calculations such as return on equity, net gearing etc etc.
Disclosure: Long JNJ & ABT
All five stocks are trading on the NYSE however AstraZeneca also trades, on my side of the pond, in London.
Business wisdom says that if a company has a large return on retained earnings, and it can put all of those earnings to use, then no dividend should be paid out as presumably those earnings are put to best use by reinvestment in the company.
Alternatively if returns on retained earnings are poor, or negative, then almost all earnings should be returned to shareholders whom are then free to reinvest their cash at higher returns.
The following table details the return on retained earnings as well as the dividend yield for the current year. The information needed to calculate the return on retained earnings was taken from www.digitallook.com. The historic period covered was 5 years and the figures may contain exceptional items.
Company | Market Cap ( $bn ) | RoRE | Dividend Yield |
JNJ | 167 | 9.06% | 3.80% |
AZN | 68.1 | 17.95% | 5.70% |
BMY | 44.5 | 18.18% | 5.10% |
ABT | 74.8 | 31.4% | 4.20% |
LLY | 39.9 | 848% | 5.70% |
A big surprise is JNJ which only returned 9% on retained earnings. JNJ also pays out the lowest yield of the five examples.
LLY has a monstrous return on retained earnings. Over the period LLY earned 903c per share and paid out 878c per share in dividends.
Note that LLY took a loss in 2008 which skewed the figures somewhat. If LLY broke even in 2008 then the Return on retained earnings would have been 99%. If EPS would have been, say, 290c in 2008 then LLY would have had a return on retained earnings of 42%.
To calculate return on retained earnings pick a company then simply add up the annual EPS, as well as the dividend per share paid out, for a specific period ( i.e. 5 years or 10 being to most common ). Then subtract the total dividends per share for the period from the total EPS for that period. So for JNJ total EPS over the 5 years covered was 1988c and total dividends per share paid out was 807.5c. Therefore subtracting the dividends from earnings (1988c less 807.5c) gives us 1180.5c of retained earnings.
The next step involves looking at the companies historic EPS again. Subtract the first year EPS from the final year EPS. Again, looking at JNJ we see it earned 338c in 2005 and 445c in 2009 (Digitallook.com obviously have not updated JNJ’s figures). So 445c less 338c equals 107c.
We then divide the 107c by the retained earnings of 1180.5c and multiply the answer by 100 which gives us 9.06%.
Return on retained earnings is a favourite measuring stick of Warren Buffett’s and is best combined with other calculations such as return on equity, net gearing etc etc.
Disclosure: Long JNJ & ABT
