1. Advance Session Equity Management Can Oklahoma Cooperatives Afford to Pay Dividends on Invested Capital? Presenter: Vern May CoBank 1-800-322-3654 EXT 02047

2. Traditional Cooperative Equity Low initial investment Equity created out of profit stream Long revolving periods No return on equity (negative return when time value of money is considered) Benefits through cash patronage and service

3. Challenges with Traditional Equity Structure Long revolving periods makes the cooperative unattractive to young producers Conflict between equity retirement and facility improvements

4. Could Cooperatives Pay Dividends on Invested Equity Increase realized rate of return on investment Might make members less concerned over revolving period Might be appealing to young producers Would require cash

5. Data Used to Investigate the Feasibility of Dividends on Equity Utilized CoBank data base of Oklahoma Cooperatives. Included data from 42 cooperatives in the State for years 2004 (22) and 2003 (20).

6. Typical Cooperative Balance Sheet 20042003 Current Assets$2.962$2.296 Current Liab.$2.059$1.438 Total Assets$4.872$4.186 Long Term Debt$.397$.381 Members Equity$2.415$2.367

7. Typical Cooperative Ratios Financial Ratios 20042003 Current Ratio1.441.60 M.E./T.A.49.5%56.5% Leverage16%16% Working Capital$.902$.858

8. Typical Cooperative Income Statement Operations 2004 2003 Sales$12.026$11.388 Margins$1.249$1.204 Other Income$.781$.765 Gross Income$2.030$1.969

9. Typical Cooperative Bottom Line 2004 2003 Expenses$1.844$1.866 Local Profit$.186$.103 Net Income$.245($.313)

10. Typical Cooperative Profit Ratios 20042003 Financial Ratios ROA 5.03%(7.49%) ROE10.14%(13.25%) Labor/GI43.5%45.3%

11. Typical Cooperative Equity Profile Equity Section 20042003 Common/Preferred St.$.704$.765 Allocated Equity$.768$1.024 Retained Earnings$.943$.578 Total Equity$2.415$2.367

12. Funds Required for Dividends on Equity Payment of 8% dividend on invested equities (Common or Preferred Stock) For 2004 would be an additional $56,320 of cash outlay. For 2003 would be an additional $61,200 of cash outlay. These are payments you are not making now.

13. Questions: Could the typical cooperative afford an additional $50,000 to $60,000 cash drain? Would members be willing to extend the redemption period if they received dividends on invested equity? Would producers be willing to invest additional funds if a return on equity was offered?

14. Impact of Dividends on Equity The payment of dividends would impact all financial ratios. Balance sheet impact following profitable operations.

15. Impact of Profits on the Balance Sheet Physical Assets Stock in Regional Cooperatives Debt Allocated Equity Unallocated Equity Cash

16. Understanding Equity Allocated equity is stock or book credits that will be redeemed at a future date Unallocated equity is permanent capital that provides a “cushion” Warehouse bond prohibits elevators from carrying negative unallocated equity

17. Equity Management Equity Section 20042003 Common/Preferred St.$.704$.765 Allocated Equity$.768$1.024 Retained Earnings$.943$.578 Total Equity$2.415$2.367

18. Simplified Income Chart Patronage Income Non-member Income Net Savings Cash Patronage Dividend Retaining Patronage Dividend Cash Regional Dividends Stock Regional Dividends Dividend payment

19. Equity Management The impact would be material to pay dividends on invested capital as it would impact the cash flow of the company. You would also need to identify any tax issues It is also necessary to examine the companies bylaws, state statutes, and seek assistance from legal and your accountant before making such a decision.

20. Equity Management CoBank’s objective is to return 11% on capital invested in the bank. This is in the form of cash and allocated equities. No dividends are paid.

21. Equity Management Example CoBank stock investment $200,000 If CoBank’s objective is met you would receive $22,000 in patronage back from the bank. You are provided a return on the investment in the bank.

22. Equity Management This provides a return to our customers and is not something you would obtain if funding with other financial institutions. Similar to your business. Our returns can be identified as a reduction in the interest paid which last year reduced your stated rate 84 BP. We operate under a Base Capital Program. This requires current users to capitalize the bank.

23. Equity Management The customer is provided market rates on interest and also obtain a return on their invested capital with out paying a dividend. Can your cooperative identify the type of return on the invested capital of the producer? Is the members needs satisfied? Is the investment he has in the cooperative retuning him an acceptable return?

24. Equity Management Summary Can you quantify for your customer base the type of returns he is getting on his investment rather then adding a dividend payout. A dividend payout will add an additional cash outlay that based on the numbers would impact cash flow. Utilize cash to begin a retirement program that can show a return to your member owners similar to what a dividend return would.

25. Equity Management If producer has investment of $5,000 At a 11% return he would be getting $550 in patronage. Many times the producer is looking at services provided and not a return on his investment in the coop. This is a major challenge for cooperatives today and places more importance on remaining profitable.