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Frontline Ltd. Message Board

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  • phillipjmonkey phillipjmonkey Jun 16, 2008 11:14 PM Flag

    Dividends

    basically depreciation counts against earnings but not the div, right?

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    • Exactly. Think about when FRO buys a ship. It incurs the entire expense as soon as it purchases the ship (cash flow/ability to pay dividends), but it does not get to deduct the entire value of the ship that it just purchased in that year. Instead, it must spread that cost over several years.

      As a hypothetical only, imagine that the ship costs $100MM but that the company can only write off $10MM that first year. That means that, in year 1, FRO would show only $10MM in expenses related to the purchase, but it actually incurred a $100MM cash drain from the purchase of the ship (not really because it used debt, but this is for illustrative purposes). In future years, FRO would also show a $10MM expense related to the purchase of that ship for accounting purposes ONLY. Because all that money was paid up-front, it actually has $10MM more in cash flow than it has in accounting profits. Hence, it has the ability to pay out higher dividends in years 2-9 than its operating profits but cannot pay out nearly as much in dividends as operating profits in year 1.

      Obviously, this is simplified and debt changes this situation somewhat, but it does illustrate the difference between profits and cash flow.

 
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2.46+0.03(+1.23%)Dec 26 4:05 PMEST

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