The company I will be discussing is The Halliburton Company. Their most recent filed financial report is their 10-K which was filed on February 11, 2020. What I like about using the 10-K report is that it is possible to get a good idea of the historical Retained Earnings in addition to the current state of the Retained Earnings account. As of December 31, 2019 the balance of the Retained Earnings account was $11,989 million, down from $13,739 million in 2018. The changes in Retained Earnings were caused by a net loss for the year of $1,131 million and cash dividends paid of $630 million. The loss of $1,131 million is a decrease in income of 168% over 2018 in which net income was $1,656 million.
From an analysts’ perspective having such a drastic decrease in revenue over such a short period of time does not typically sit well with investors, yet despite the fact that Halliburton experienced a net loss for the period they still paid out dividends, to the tune of $0.72 per share. This in and of itself is not a significant return on investment per share, but dividends have been consistently paid out at a rate of $0.72 per share for the past three years (2017-2019) and one can assume that the trend has continued from even further back (10-K, 2020). The nature of the oil and gas industry is extremely volatile so it is not unusual for this type of company to experience such fluctuating revenues. Granted the situation is not ideal, however investors can expect to such highs and lows to be common over the course of operations. As long as investors are receiving dividends and earning money, for the most part they are content to weather the losses in order to obtained the gains. At this point I would expect shareholders to hold their stocks and wait to see what happens in the coming year. It’s interesting how oil and gas companies deviate from the typical course of business by having such dramatic gains and losses, but are still able to pay out consistent dividends to investors. If you are a savvy investor with an iron stomach this may be the market for you to invest in.
Of course, many companies with negative retained earnings have indeed lost money in the past.
One of the most important indicators of durable competitive advantage. Net earnings can be paid out as dividends, used to buy back shares or retained for growth. If the company loses more than it has accumulated, retained earnings is negative. If a company isn’t adding to its retained earnings, it isn’t growing its net worth. Rate of growth of retained earnings is good indicator whether it’s benefiting from a competitive advantage. The more earnings retained, the faster it grows and increases growth rate for future earnings.
So I selected Tesla, Inc. for my discussion in week 3 mainly because I am looking into the electric vehicle that will help me with the cost of my daily commute to work.
I think with Tesla finally reporting a Zero balance in retained earnings versus a negative amount shows promise that the company is moving in the right direction.
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