Question

Locate the most recent 2017 financials for Kimberly-Clark and review the notes related to the firm’s financials. The $2.3 billion of cash returns to shareholders in 2017 was a significant event. What effect will this have on future operating profitability, return on common equity, and earnings-per-share growth?

Answer 1

If the cash returned to the shareholders via dividends and share repurchase was indeed a surplus cash and could not have used to generate further growth or be invested profitably, then this exercise won’t impact operating profitability.

Since the large amount of cash which would have been other wise added to retained earnings and would have contributed to increase in common equity was in fact returned to share holders, so the common equity decreased or did not increase to the extent it would have if cash was not returned.

Since Return on Equity = Net income / Common equity

Since common equity decreases, so with net income stable, the Return on Equity should increase.

Also since share repurchase was done, so number of share outstanding decreased.

EPS = Net Income / Outstanding share

With a stable net income and a decrease in outstanding shares, the EPS increased which would result in EPS growth as well.