What is the net income applicable to common stock?

Definition of Net Income Applicable to Common Stock

Net income applicable to common stock is the income that can be distributed to shareholders after deducting taxes, preferred stock dividends, and non-controlling interests.

Definition and Examples of Net Income Applicable to Common Stock

Net income applicable to common stock is a figure on the company’s income statement. It informs investors about the amount of income remaining that can be distributed to common shareholders. This figure is also referred to as earnings available to common stockholders.

It’s important to note that there is no guarantee that the company will distribute all or part of the available earnings. There may be other financial circumstances, such as expansions or other large investments that the company may need, requiring the remaining capital. The company may adopt a policy of not paying dividends.

Financial statements may not always clarify how much income is available. In this case, you can check the company’s annual disclosure to the Securities and Exchange Commission, known as “10-K”. For example, Ford Motor Company reports net income available for common stock and Class B in the notes of their form – there was $17.9 billion available at the end of 2021.

Note: This figure is also the starting point for calculating basic earnings per share and diluted earnings per share.

How to Calculate Net Income Applicable to Common Stock?

As shown in the example of Ford Motor Company, you can use the figure published by the company in its annual financial report. If the income statement does not mention net income available for common stock, you can use the company’s net income and subtract preferred dividends.

For example, suppose you own a business and issued preferred and common stock. Assume that in one year, $3 million was generated in revenue and total expenses were $1 million. You paid $500,000 to preferred shareholders. In this case, you have $1.5 million as earnings available for common shareholders.

What Does This Mean for Individual Investors?

For the investor, net income available for common stock is an opportunity to receive distributions or dividends if the company issues them. However, companies are not obligated to pay dividends – unless the shares are dividend-paying stocks. Some companies do so when they can, while some do not pay them at all. Others, like Coca-Cola, always pay quarterly dividends.

Note: You may find it useful to know how mature the company is when looking for investments that could generate dividends. A young, growing company that generates significant income for common shareholders is more likely to reinvest in itself. A more mature company might distribute dividends.

Net income available for common stock does not always mean there is surplus cash or capital available for shareholders. For example, a company might have high income available for common stock. However, if the reported earnings for the year exceed the cash reserves for the year, the company may choose to allocate capital to its cash accounts for cash-required expenditures.

There are situations where shareholders may benefit better. The company’s management could use the funds to reduce risks by retaining them for other purposes rather than seeking to grow net income.

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Sources:

– Ford Motor Company. “Form 10-K For the Fiscal Year Ended December 31, 2021,” Pages 110, 129.

The Coca-Cola Company. “When Does the Company Pay Dividends?”

Source: https://www.thebalancemoney.com/net-income-applicable-to-common-shares-357584