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I received the annual report from Tricon today.
On page 40,Consolidated Balance sheet, they list
Shareholder's Deficit. Can someone explain this to me,
please.
Thanks
egs
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I received the annual report from Tricon today. On page 40,Consolidated Balance sheet, they list Shareholder's Deficit. Can someone explain this to me, please.
Thanks
egs


Stockholder's equity is determined by a simple formula:
Book value of assets - total liabilites = Stockholder's equity.

When YUM was spun off from Pepsi, it was also given a huge amount of debt. So much that the book value of the assets was less than the debt. That gives YUM a negative stockholder's equity also known as a stockholder's deficit.

This isn't as bad as it sounds. First, some of the assets (such as real estate) are carried at cost less depreciation. The market value of these assets often FAR exceeds the book value. You can see some of this in the income statements since YUM is selling some of its resturants to franchisers it is getting a capital gain ($381 million last year) to account for the difference is book value vs. market value.

Second, YUM's cash flow is huge! They are paying down the debt at an astounding rate so that this year's debt is about a billion $$$$ less than last year's. This also means that the stockholder deficit is decreasing (though at a slower rate since some of the decrease in debt of from sale of assets).

Third, as net income continues to rise, retained earnings should rise which will further decrease the deficit. In fact it shouldn't be long before that deficit is gone and changes to a positive shareholder equity. At the current rate, we should go to a positive book value before the end of this year, but it may take a little longer if expenses increase or management sells off assets at less than book value.

Brian
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Brian,
Thank you for a very informative reply.
egs
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Brian - You left out one significant component in the stockholder deficit discussion. When a company buys back stock the dollar value of the purchase will be subtracted from shareholders equity. In the fall, Tricon announced a $350mn share repurchase of which $250mn was completed by the Year-End earnings release. This $250mn will be a decrease to shareholders equity with balancing entry being either an increase in debt of $250mn or a decrease in cash of $250mn. Should YUM continue to buy back shares with its tremendous free cash flow, book value may not increase, but shareholder value will. Brian, you should check out www.ValueInvestorsClub.com for more discussion on certain value ideas.
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Brian - You left out one significant component in the stockholder deficit discussion. When a company buys back stock the dollar value of the purchase will be subtracted from shareholders equity. In the fall, Tricon announced a $350mn share repurchase of which $250mn was completed by the Year-End earnings release. This $250mn will be a decrease to shareholders equity with balancing entry being either an increase in debt of $250mn or a decrease in cash of $250mn. Should YUM continue to buy back shares with its tremendous free cash flow, book value may not increase, but shareholder value will. Brian, you should check out www.ValueInvestorsClub.com for more discussion on certain value ideas.


Yep, I left out the share repurchases (by the way, it's $134 million completed by year end, but that's not important).

Share purchases and sales do effect the shareholders deficit. In this can the share repurchases reduced the paid in capital by $134 million, but there have also been stock option exercises and compensation related issuances that increased paid in capital by $86 million.

By far the largest effect on shareholder's deficit is the deficit in retained earnings ($1,691 million as of year end). By the same token, the largest change in the deficit is due to retained earnings ($627 million). Again, I expect that earnings will continue to be a large portion of the change in stockholder's deficit (equity). If earnings and retained earnings continue at their current pace, we should be in positive teritory by year end 2000. However, large share repurchases and other events can change the timelines.

Brian

P.S. I didn't have a copy of the annual report when I wrote my first response. There is a VERY nice chart on page 41 which shows all the adjustments to stockholders equity since 1996 (including the spinoff charges).

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