Famed industrialist John D. Rockefeller once quipped that the only thing that gave him pleasure was to see his dividends coming in. A lot of income investors feel that same way, especially those that rely on dividend income to meet their personal expenses. That's why it's important for investors to have a firm grasp on the security of these payments. One way to better understand a company's dividend is to see how much cash a company is actually paying its investors each year. Here's how to calculate that number from the company's balance sheet.
Calculating dividend payments from a company's balance sheet is rather easy. All an investor needs are the retained earnings from the past two years and the current year's net income figure. The formula is: Prior year's retained earnings + current year's net income - current year's retained earnings = payment of dividend on balance sheet.
Using a real-world example, here's a snapshot of the equity portion of oil-field service giant Halliburton's (NYSE:HAL) balance sheet from its 2014 annual report, with its retained earnings from the past two years highlighted:
Next is Halliburton's income statement from that same annual report highlighting its then-current year's net income.
From these snapshots we'll pull the following numbers:
- Retained earnings from previous year: $18,842
- Retained earnings from the current year: $21,809
- Net income from current year: $3,501
We then plug these numbers into the formula and out comes the dividends paid from the balance sheet: $18,842 + $3,501 - $21,809 = $534. What this tells us is that Halliburton paid $534 million in dividends to shareholders last year, according to its balance sheet.
There's a really easy way to check the math on this if the company also prepares a cash flow statement. Just look for dividends to shareholders under cash flows from financing activities:
According to the company's cash flow statement it paid $533 million in dividends to shareholders in 2014, which is a mere rounding error away from the amount we found by calculating dividends paid from the company's balance sheet. The reason why this number is important is it gives investors an idea of how much actual cash the company pays its investors. To put it in perspective, if Halliburton can't cover its $533 million annual dividend payments with either cash on the balance sheet or cash flow, it would be a warning sign that the dividend might soon be toast.
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