What does this indicate?

[Arborbridge]

I've been looking at company fundamentals on the "iii" site. One of the factors listed is "profit available for dividend". Does anyone know what this means, or how it is calculated. At first, I assumed it was a measure of free cash flow, which would be a useful number, but I'm not so sure.
On the link for Unilever, you can see that the latest year this is given as n/a;

http://www.iii.co.uk/research/LSE:ulvr/fundamentals

Other companies have various years listed as n/a - indeed United Utilities is all n/a. So does this means something sinister like "all the cash has been spent" or does it simply mean no one has worked it out so it is n/a, not available?
Both companies apparently have dividend covered by eps and positive earnings after tax.

Any ideas?

[Gengulphus]

I've been looking at company fundamentals on the "iii" site. One of the factors listed is "profit available for dividend". Does anyone know what this means, or how it is calculated. At first, I assumed it was a measure of free cash flow, which would be a useful number, but I'm not so sure.
On the link for Unilever, you can see that the latest year this is given as n/a;

http://www.iii.co.uk/research/LSE:ulvr/fundamentals

Other companies have various years listed as n/a - indeed United Utilities is all n/a. So does this means something sinister like "all the cash has been spent" or does it simply mean no one has worked it out so it is n/a, not available?
Both companies apparently have dividend covered by eps and positive earnings after tax.

Any ideas?

Check out the income statement in Unilever's annual report for a year in which the figure is given, such as 2014, and what the figures mean should soon become clear - an extract from it is:

Profit before taxation 7,646 7,114 6,533
Taxation 6A (2,131) (1,851) (1,697)
Net profit 5,515 5,263 4,836
Attributable to:
Non-controlling interests 344 421 468
Shareholders’ equity 5,171 4,842 4,368

(the figures being for 2014, 2013 and 2012 from left to right).

So the answer is that the "non-controlling interests" (also sometimes known as "minority interests") are being subtracted. Those arise from subsidiaries that are less than 100% owned by Unilever: for some reason I've never got to grips with, a subsidiary that is say 90% owned by Unilever doesn't have 90% of all its figures consolidated into Unilever's accounts, but 100% of them and then the 10% that isn't owned by Unilever is 'backed out' of Unilever's figures at the end as "non-controlling interests" or "minority interests".

Armed with that information, it's easy to check the 2015 annual report and see that 350m of "non-controlling interests" should be subtracted, leaving 4,909m (euros, by the way, not pounds, despite the "GBP"s given for the currency in our link).

As to the reason that it's "n/a" in your link, I'd guess sheer sloppiness by iii. The currency error is another example, and the fact that "Dividend Per Share Wholeyear" is given as "n/a" for 2014 yet another: the figure is both applicable and available, making both meanings of the abbreviation wrong: they just haven't bothered to provide it!

When dealing with secondary data sources, always be on the alert for errors and other sloppiness, and go back to the primary data sources if you need to sort out any problems...

Gengulphus

[Lootman]

I've been looking at company fundamentals on the "iii" site. One of the factors listed is "profit available for dividend". Does anyone know what this means, or how it is calculated. At first, I assumed it was a measure of free cash flow, which would be a useful number, but I'm not so sure.

I always assumed that "free cash flow" was the net amount of cash generated after all liabilities. And those liabilities include the dividends paid, even thought they are discretionary. So put another way: net earnings = dividends + free cash.

But "profit available for dividend" isn't a phrase that I've seen before so now I'm not so sure either. To me that is simply the net earnings after iabilities but before the dividend has been paid..

So unless the dividend cover is less than one, there will always be surplus ("free") cash flow.

Any accountants in the house?

[Dod1010]

I am not an accountant, but my understanding is that profit available for dividend is usually the last figure of the income statement, ie profit after deduction of minority interests and taxes. It has nothing to do with cash flow. However cash flow is very important because a profit could at worst be practically all in the form of a 'book' profit only, if for instance the company is having to fund creditors or increased stock or whatever. Hence the cashflow statement incorporated in company accounts nowadays. Many a company has made a profit according to its income statement (or P & L Account as it used to be called) but does not have the cash to cover a proposed dividend. Hence the reason so-called 'cash conversion' is so important. It used to be common for contractors to book all or part of a profit ahead of the job being completed because staged payments allowed them to fiddle with it.

I have no idea what n/a means in the analysis that Arb is citing.

[Dod1010]

Lootman

Sorry I see you posted just before me. I do not think that you are correct that Net earnings= Dividends +Free Cash. Net Earnings =Net Earnings.

I think what needs to be remembered is that the net profit earned (usually net after tax and minority interests but before dividends) is something quite separate from net cash earned and free cash in the Balance Sheet. Sure they are related but they are two separate issues.

[Arborbridge]

As I feared, this isn't a shorthand way of getting a grip on the free cash flow.

It probably doesn't have any advantage over looking at the usual dividend cover - actually it might be more misleading, more optimistic. I was interested in knowing what "profit available for dividend" meant for the reason Dod mentioned: profit can be pretty useless in paying the dividend, but I hoped they meant " free cash".

Well, Gengulphus has uncovered an interesting fact - that the n/a might just mean the numbers haven't been filled in, rather than "sorry guys, the profits all been spent" (though it might mean that too!).

Arb.

[Gengulphus]

I always assumed that "free cash flow" was the net amount of cash generated after all liabilities. And those liabilities include the dividends paid, even thought they are discretionary. So put another way: net earnings = dividends + free cash.

No, "free cash flow" is supposed to be the cash flow that is available after paying everything needed to keep the business going at its current level. I.e. it's the cash that is available to reward the investor, whether that reward is in the form of cash paid out to the investor as dividends (or other distributions), or in the form of an expansion of the business (i.e. cash retained and invested by the company), or in the form of cash retained and not (yet) invested by the company - i.e. an increased cash pile or decreased debt burden.

It's an excellent measure in theory, with one major practical drawback: it's very hard to determine what it is! The difficulty is capital expenditure: when a company buys assets, often some part of the expenditure is to replace things that have worn out, become outdated, etc, and that need replacement to keep the company's operations going at their current level, and the rest is actually improving the company's business position. Cash spent on the former "maintenance" part is not "free cash flow", cash spent on the latter "expansionary" part is "free cash flow", so to evaluate free cash flow, one needs to decide how much of each there is.

One could in principle require companies to assess the division on every significant item of capital expenditure and report the resulting totals. In practice, though, life is too short and the costs too high - and I suspect the opportunities for 'creative' accounting too great! And so accounting standards don't require any such division of capital expenditure to be tracked, and investors come up with various techniques for estimating it... None of which I remember offhand - this is stuff I look up if and when I want it! Which doesn't actually happen all that often: as a general rule, I try to regard the fact that I have a 'free cash flow' issue about a company that needs resolving as a warning sign in itself...

There is also the issue that in 'growth' business areas, keeping a company's business going at its current level may not be a realistic option: a company that does that will die due to reduced market share. I.e. in such areas, some of the 'free cash flow' may in fact be needed to keep the company viable, and so isn't so 'free' after all. Which is OK if the remaining 'free cash flow' after subtracting that necessary expansionary expenditure is still positive - it just means that the investor has to be rewarded by company expansion rather than the other routes. It's not so good if the remaining 'free cash flow' is negative...

Gengulphus

[Dod1010]

BTW, Gengulphus has confused the issue by introducing minority interest into the discussion. This has little to do with 'free cash flow' and the amount available for a dividend which is what Arb was asking about. However, the accounting rules are such that if you are a parent company which has a controlling interest in another entity (usually regarded as a holding of more than 20%) then that entity must be fully consolidated with the parent as though it was not a separate entity. Any profit belonging to a minority interest in the subsidiary is then deducted at the foot of the Income Statement as Profit attributable to minority interests. This allows for all the assets and liabilities of the subsidiary to be taken into account in the Consolidated Balance Sheet. Why? Well the subsidiary might be very highly geared for instance, and that should be shown in the accounts of the parent. If for instance, only the profit of the subsidiary were to be shown in the books of the parent, the theory is that that would not show the true financial position of the group. It is in fact the basis of Consolidated Accounting.

None of this has much to do with free cash flow for which see my earlier e-mail.

Dod

[Gengulphus]

BTW, Gengulphus has confused the issue by introducing minority interest into the discussion. This has little to do with 'free cash flow' and the amount available for a dividend which is what Arb was asking about. ...

Nonsense. Read Arb's original post and you'll see that it asks for the explanation of iii's "profit available for dividend" figure ("I've been looking at company fundamentals on the "iii" site. One of the factors listed is "profit available for dividend". Does anyone know what this means, or how it is calculated."). That explanation is that it's the profits left after subtracting minority interests, as can be seen by checking the annual reports: it is exactly what Arb asked for.

Arb went on to speculate that the explanation might be something to do with free cash flow ("At first, I assumed it was a measure of free cash flow, which would be a useful number, but I'm not so sure."). That speculation was a pretty natural interpretation of the phrase "profit available for dividend" - but as Arb was starting to suspect, it was wrong, and anyone using iii's numbers as free cash flow figures is barking up the wrong tree.

What I said about minority interests and the original issue of what iii's figures are has cleared that issue up, to the extent that no-one (including me in subsequent posts) has said anything more about it, and the discussion has moved on to the original side-issue / speculation of free cash flow. I've no objection whatsoever to that - but I do object to being accused of confusing the issue of free cash flow when in fact I cleared the way for it to become the main issue in this discussion!

Gengulphus

[Arborbridge]

Yes, it was the issue of free cash flow I was trying to arrive at, but I acceot that the 3i figure will not help.

I do agree with what Gen said about free cash flow - there are some imponderables centre around Capex. When I did these calculations for myself, that was the section which always cast doubts. One might, for example, reasonably take out the cost of a supermarket opening a new store, since that is expansion not maintenance: until a few years later they start selling or closing stores! There seem rather few accounts which are simple enough or clear enough for a semi-trained idiot to be quite certain what is maintenance and what is not, so it's safer just to take out all capex.

After some trials, I found that the cash flow I calculated was near enough the same as that given in Company REFS - but unfortunately, last year I decided to let my subscription lapse so no longer have access.
There is Morningstar which publishes cash flow I believe, but as to 3i - it looks as though the answer is that it won't be a substitute for Company REFS - although I do like some of the other features on the site.

[Dod1010]

This was supposed to be a discussion not an argument (at least so I thought) so I would prefer that no-one said what anyone else wrote of as nonsense, especially since at least I do not have a professional handle on the matters being discussed. Just trying to be helpful. I may do as promised earlier and just stop posting.

[Arborbridge]

Dod, lighten up - I am sure Gengulphus meant nothing. I find it helps to get used to his style, and also to develop a thick skin. It's also worth bearing in mind that thoughts come over rather differently on blogs than they would in real life when you can see he body language.

I for one would feel the loss if you didn't post any more because you have come up with some useful ideas.

Anyhow - you can't go until you post your full year review you promised

[Gengulphus]

This was supposed to be a discussion not an argument (at least so I thought) so I would prefer that no-one said what anyone else wrote of as nonsense, ...

And I would prefer that no-one said I was confusing the issue when I was giving a clear answer to the question in the OP.

Like you, I want a discussion rather than an argument - but I want a discussion in which any incorrect statements can be dealt with reasonably quickly and efficiently, without a refutation of a statement being treated as an attack on the person who made it. And I most especially don't want a discussion environment in which you can describe what I said as confusing the issue, but I cannot describe what you said as nonsense. Either they're both attempts to make an argument out of a discussion, or neither is - I prefer the latter.

... especially since at least I do not have a professional handle on the matters being discussed. Just trying to be helpful. I may do as promised earlier and just stop posting.

Neither do I have a 'professional handle' on accountancy matters. And I don't want you to go - but better that than accept a one-sided discussion environment in which I have to pussy-foot around about how I describe what you say while you can describe what I say however you like.

Gengulphus

[Lootman]

I most especially don't want a discussion environment in which you can describe what I said as confusing the issue, but I cannot describe what you said as nonsense. Either they're both attempts to make an argument out of a discussion, or neither is - I prefer the latter.

As a neutral here, I'd say that both phrases are somewhat dismissive of the other person. But I think that alleging confusion is a slightly more delicate way of disagreeing than characterising somebody's post as nonsense.

A useful rule of thumb might be to always avoid characterising what someone said and instead make it clear that you're simply offering a different view. It's up to readers to decide who is right and what is confuisng or nonsense, not the parties to the debate. So the exchange might go like this:

Dod: "From my perspective it seems confusing to introduce X"
Gen: "Respectfully, I'd like to show the relevance of X and how it helps bring clarity, not confusion."

Then again, by global standards we Brits are considered to be needlessly polite all the time, to the point of sometime failing to get to the point at all. Very British problems.

[Dod1010]

Well said Lootman, but also Gengulphus and Arb. All taken in good part so let's move on.

Arb seems to have had his queries answered so that is what really matters.

As of 31 December I will certainly post my 2016 review, although I have not done much this year, as I recall.

Goodnight to all

Dod

[Arborbridge]

Dod - glad you are staying with us