How does the modified Dupont Model reward utilities?
Jean Reaves Rollins is managing partner at C Three Group.
The impact of dividend policies, capital expenditures, and publicly traded equities highlights an in-depth look at what goes into the modified Dupont Model behind the financial rankings for utilities.
The original Dupont Model was developed to address the need for performance metrics, or in today’s terminology, financial benchmarks of an asset-intensive industry, specifically I.e. Dupont’s chemical businesses. Our use of the original 1919 model has been modified to include the impacts of dividend policies, capital expenditures, and publicly traded equities. Even though the original model is pushing 90 years of age, and many newer, more complex models are in use today, the Dupont remains a key tool for the financial assessment of the players in an asset-intensive industry.
While the Dupont is targeted specifically to asset-heavy industries, the model itself is not asset-heavy in its weightings. In fact, profitability measures come close to dominating how a company is ranked. We pulled apart the six formulas that when combined on an equal weighting determine the ranking of a company in the Fortnightly 40. There are eight key components of the formulas as shown in the left-hand column of Table 1. The profitability measures are a combination of Net Income, Net Income Before Taxes, and Net Income Before Taxes and Depreciation.