thecashflowsfrom operations(whichusuallyincorporates
netincome,depreciationandthechangeinnoncashworking
capital) but we then have to selectively subtract capital
expendituresandcashacquisitions(fromthecashflowsfrom
investments) and debt cash flows (from cash flows from
financing). We still have to go outside the cash flow
statement to obtain information on stock acquisitions.
Comparing Dividends to Potential Dividends (FCFE)
Theconventionalmeasureofdividendpolicy—thedividend
payoutratio—givesusthevalueofdividendsasaproportion
ofearnings.Incontrast,ourapproachmeasuresthetotalcash
returnedtostockholdersasaproportionofthefreecashflow
to equity.
TheratioofcashreturnedtoFCFEtothestockholdersshows
howmuchofthecashavailabletobepaidouttostockholders
isactuallyreturnedtothemintheformofdividendsandstock
buybacks.Ifthisratio,overtime,isequalorcloseto1,the
firmispayingoutallthatitcanto itsstockholders.Ifitis
significantlylessthan1,thefirmispayingoutlessthanitcan
afford to and is using the difference to increase its cash
balance.Ifitis significantlyover1,thefirmispayingout
morethanitcanaffordandiseitherdrawingonanexisting
cash balance or issuing new securities (stocks or bonds).