Although the University has very few business classes, it does offer an outstanding ways to get hands-on business and finance experience. Devil's Delivery Service, a provider of delivery service for Subway, Cattleman's, Han's and Bull City Grill, is a student-owned and managed businesses. They both sell shares to undergraduates, and besides the valuable experience that these two businesses may offer, their shares may also represent good investment opportunities.
When you purchase a share of a company, you are essentially buying the rights to a certain portion of the company's profits. If you own 10 percent of a company, you are entitled to 10 percent of the profits. Although some larger, more established companies pay a small portion of profits to shareholders as dividends (not more than a few percentage points), most businesses retain most of their profits to fund further growth of the company.
For public stocks, shareholders typically make investments with the hope that the share price will rise. Investors are willing to pay more for companies with greater earnings (earnings simply mean profits or net income) or for companies with potential for greater profits. A stock's price is determined upon what investors are willing to pay; there is no exact formula that sets a public stock's price.
Devil's Delivery Service is quite different from a public company, however. Organized as a Sub-Chapter S Corporation for tax reasons, all profits are paid-out to shareholders. Whereas a public company can reinvest this money internally, the delivery service must distribute all profits as dividends. As a Sub-Chapter S Corporation, there is no corporate income tax paid; individuals are responsible for paying taxes on their personal dividends only.
With DDS, since there is no market through which to trade their stock, the company sets the price of the shares using a pre-established formula. Although it could set the price as high as people would pay, DDS has decided to strike a balance between encouraging active new shareholders and rewarding current shareholders. Each share is now sold for $7,517.84. Since there are 25 shares, the total business is valued at $187,946, for a company with revenues of approximately $700,000.
To set this price, DDS takes the dividends per share for the current fall and the previous spring semesters (which equals total profits per share for the two semesters) and divides this by a predetermined return on investment (ROI). This is a subjective measure determined by DDS and should be one of the investor's focuses when determining if these shares are fairly priced.
DDS uses an ROI of 35 percent in calculating the value of most of their business. Therefore, if DDS were to earn the same amount in the next two semesters, your dividends will represent a 35 percent return on the amount you invested. There is also upside potential to this investment from increases in the share price. If DDS is able to increase its profits, the share price will rise accordingly. Conversely, a fall in profits will result in a decreased share price.
DDS uses an ROI of 35 percent to reflect the risk it thinks is inherent in its business. A riskier business would expect a higher ROI, because for this added risk you would expect a greater return on your investment. In the case of DDS, a higher ROI would be reflected by a lower, or discounted, share price.
Before investing in DDS, it is imperative to consider the risks involved with the company. Besides the risk of reduced profits, an investor must consider the risk of failure. As a provider of outsourced food delivery service, DDS will have no revenue without its Subway, Cattleman's and Bull City, etc. contracts. Furthermore, since DDS has no assets that can be distributed to shareholders in the case of business failure, the investment would be lost except for dividends earned.
DDS has tried to limit these risks as much as possible. Having operated for four years, DDS appears to have successfully rolled-over most vendor contracts from one year to the next. Also, by expanding delivery service beyond just Subway, DDS has reduced its reliance upon any one vendor contract.
Although the investment in DDS may be financially rewarding, students should consider being a shareholder in DDS as a great way to gain hands-on business experience that no class can provide. Before buying a share, though, it is important to consider all of the risk factors as well.
Eric Weisman is a Trinity senior. This article is not intended to replace the advice of a professional financial adviser. This article is also not intended as a solicitation to buy or sell and security, nor is the author licensed to do so.
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