Question

Exercise 12-82
Stockholder Ratios

Financial statements for Steele Inc. follow.

Steele Inc.
Consolidated Income Statements
(in thousands except per share amounts)
		2019		2018		2017
Net sales		$7,245,088		$6,944,296		$6,149,218
Cost of goods sold		(5,286,253)		(4,953,556)		(4,355,675)
Gross margin		$1,958,835		$1,990,740		$1,793,543
General and administrative expenses		(1,259,896)		(1,202,042)		(1,080,843)
Special and nonrecurring items		2,617		0		0
Operating income		$701,556		$788,698		$712,700
Interest expense		(63,685)		(62,398)		(63,927)
Other income		7,308		10,080		11,529
Gain on sale of investments		0		9,117		0
Income before income taxes		$645,179		$745,497		$660,302
Provision for income taxes		(254,000)		(290,000)		(257,000)
Net income		$391,179		$455,497		$403,302

Steele Inc.
Consolidated Balance Sheets
(in thousands)
ASSETS		Dec. 31, 2019		Dec. 31, 2018
Current assets:
Cash and equivalents		$320,558		$41,235
Accounts receivable		1,056,911		837,377
Inventories		733,700		803,707
Other		109,456		101,811
Total current assets		$2,220,625		$1,784,130
Property and equipment, net		1,666,588		1,813,948
Other assets		247,892		248,372
Total assets		$4,135,105		$3,846,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$250,363		$309,092
Accrued expenses		347,892		274,220
Other current liabilities		15,700		0
Income taxes		93,489		137,466
Total current liabilities		$707,444		$720,778
Long-term debt		650,000		541,639
Deferred income taxes		275,101		274,844
Other long-term liabilities		61,267		41,572
Total liabilities		1,693,812		1,578,833
Stockholders’ equity:
Preferred stock		$100,000		$100,000
Common stock		89,727		89,727
Additional paid-in capital—common stock		128,906		127,776
Retained earnings		2,397,112		2,136,794
		$2,715,745		$2,454,297
Less: Treasury stock, at cost		(274,452)		(186,680)
Total stockholders’ equity		$2,441,293		$2,267,617
Total liabilities and stockholders’ equity		$4,135,105		$3,846,450

Use the information provided above and below to respond to the following requirements.

	Year ended December 31,
Item	2019	2018
Average number of common shares outstanding (thousands)	362,202	364,398
Preferred dividends (thousands)	$24,000	$24,000
Dividends per common share	0.36	1.54
Common dividends (thousands)	130,861.00	561,172.30
Common stock repurchases	0	0
Market price per share:
High	83.25	79.10
Low	63.25	59.00
Close	78.42	66.36

At January 1, 2018, total stockholders' equity was $2,083,122 and there was no preferred stock.

Required:

1. Compute the earnings per share, return on common equity, dividend yield ratio, and dividend payout ratio (in percentage terms, rounded to two decimal places except for EPS, which should be rounded to nearest cent) for 2018 and 2019.

	2019		2018
Earnings per share	$		$
Return on common equity		%		%
Dividend yield ratio		%		%
Dividend payout ratio		%		%

2. Conceptual Connection: Indicate whether there were significant changes in these ratios between the years ended December 31, 2019, and December 31, 2018.

Determine whether the stockholder ratios suggest that Steele was a better investment at December 31, 2019, or December 31, 2018.

Answer 1

Earning per share = (Net Income - preferred dividends ) / Average number of common shares outstanding

2019 = (391179 - 24000 ) / 362202 = $1.014

2018 = (455497 - 24000 ) / 364398 = $1.18

Return on common equity = (Net Income - preferred dividends ) / Avg.common equity

2019 = (391179 - 24000 ) / (89,727 + 128,906 + 2,397,112 - 274,452 + 2167617)/2 = 367179 / 2254455 = 16.29%

2018 = (455497 - 24000 ) / ( 89,727 + 127,776 + 2,136,794 - 186,680 +2083122) = 431497 / 2125370 = 20.30%

Dividend yield ratio = Dividend per share / Market Price per share

2019 = $0.36 / $78.42 = 0.459%

2018 = $1.54 / $66.36 = 2.32%

Dividend payout ratio = Dividend per share / Earning per share

2019 = $0.36 / $1.014 = 35.5%

2018 = $1.54 / $1.18 = 130.51%

The year 2018 showed very good profits . EPS and Dividend payout making the investment very attractive.