Chase Koch Startup Grind Interview and Q&A

Koch Industries Profit Margins and Dividends Update

I have spent time in the past analyzing and estimating the profit margin of Koch Industries and also estimated how much David Koch, Charles Koch, and the Marshall family pull in from dividends. It has been some time since I looked at all of this and wanted to update these figures given recent information.

A recent estimate shows that Koch Industries earns $110 billion of revenues per year. This brochure from Koch Industries shows that Koch has reinvested $100 billion back into the company since 2003. Koch reinvests 90% of their earnings back into the company. The brochure has a publication date of 2018 so let's assume $100 billion was reinvested over a 15 year period (2003-2018). So if $100 billion represents 90% of earnings that were invested back into Koch Industries this would say that Koch earned $110 billion from 2003 to 2018. The average Koch would earn per year would be ~$7 billion a year ($110 billion/15 years). This is of course is before taxes are paid. The average tax rate paid by S&P 500 companies is 24%. Factoring in 24% taxes would say Koch earns around $5.6 billion per year after-tax. Of course as I mentioned this is an average. The $100 billion was over a 15 year period. So if we use the average amount per year of ~$7 billion and use 2010 as a starting point (the middle of the years in the 15 year period) and grow it by 12% per year (this is the average growth rate of Koch Industries as discussed by Charles Koch and also discussed in this Discovery Koch newsletter) it would say Koch Industries earns ~$18 billion (this estimate would be on the high side).

Now the question is if Koch earns $110 billion in revenue how much is profit (after-tax)? Well under a conservative view it would be ~5% ($5.6/$110 billion) and under probably a maximum amount of roughly 13% ($14 billion/$110 billion). The true profit margin for Koch Industries is probably somewhere in between 5% and 13%. As I mentioned in this post Koch Industries in 1982 had revenues of close to $17 billion and had earnings on that revenue of $309 million. In the prior year of 1981 the company (according to the Koch vs. Koch case) had $15.7 billion in revenue and earned $273 million which would only be a profit margin of 2%. This would say Koch has a razor thin profit margin of 2%. Another way to look at profit margin is let's say there are 365 days in one year. If Koch has a 2% profit margin this means the company is only making profit 7 days out (2% x 365) of the year. Also in a recent article about Koch Disruptive Technologies it is mentioned that this division is a pre-revenue company which to me translates into no revenue, no earnings, and no cash flow. The other thing to consider is the largest asset of Koch Industries is Georgia Pacific. Before Koch purchased Georgia Pacific the company had a profit margin as I mention here of only 3%. According to Bloomberg Georgia Pacific has estimated revenue of $19.4 billion-this would currently represent about 18% of all the revenue that Koch Industries earns.  This would lead me to believe the profit margin is closer to the 5% than the 13%. The average profit margin recently for S&P 500 companies is 11.1%  which would mean many companies have a higher profit margin than Koch Industries.

Now that the revenues and profit margin are better understood the dividends for Koch Industries can be examined. If Koch earns on average $7 billion/year ($5.6 billion after paying taxes) and pays out roughly 7% of their earnings as dividends (the company did at one point did pay out only 1% of earnings as mentioned in this article from the late 1980's) and if Charles and David Koch own each a 42% interest in Koch Industries stock then Charles and David Koch each pull in ~$160 million per year in dividends (once Charles and David receive the dividends they also pay income taxes on that income as well). If we use the average amount of $5.6 billion of earnings (after-tax) and start in 2010 and grow this by 12% per year then the earnings would be ~$14 billion (after-tax) by 2018 and if Koch pays out 7% of their earnings as dividends x a 42% ownership interest would mean over $400 million dividend each for Charles and David Koch. Using these same metrics would say that the Marshall family (who have a 15% interest in Koch Industries) would generate between $60 million and $140 million per year in dividends. This dividend estimate seems quite reasonable as Preston Marshall (son of Elaine Marshall) would testify in court that the trusts that held Koch Industries stock would generate $120 million per year in dividends. Preston handled the administrative work for her trusts (prepare the books, prepare tax returns, facilitate trust distributions for his mother Elaine Marshall) so he would have an understanding of what occurring.

My estimates would show that Koch Industries has a profit margin between 5% and 13%. My estimate is the profit margin is closer to the 5% figure though. Also the company generates dividends for Charles and David Koch between $160 million to $400 million per year. For the Marshall family Koch Industries stock generates between $60 million to $140 million per year. This would say that Koch Industries pays between $380 million to $940 million in dividends it's shareholders. My guess would be the dividends are on higher end given the testimony of Preston Marshall. The growth of dividends came from a company policy of reinvesting 90% of earnings back into the company which would scare most S&P 500 companies. This growth has fueled not only the growth of Koch Industries but also the dividends to Koch Industries shareholders.