This blog relates to Dividend policy which is featured in Topic 9 in the book:
In any economic downturn companies will be forced to re-examine their financial position. One key aspect of this will be their dividend policy. We are already seeing this happen with high street stores like Debenhams slashing these payments to shareholders. In finance we see such announcements as sending a very important message to a company's shareholders. There is little doubt that the annual dividend announcement is normally seen as an important signal of the future performance of the company. The senior managers who set the level of dividends are operating from inside the business which gives them greater information about the company’s current trading performance. This means that the decision to cut dividends can be taken as a very bad signal as they perceive future earnings to be insufficient to maintain dividends at current levels. This is yet more bad news for shareholders. Not only have they seen the capital value of their investments collapse in recent weeks but now the income they might rely on is being heavily reduced. Against this background shareholders are learning a very hard lesson in finance. Remember shares are high risk and high return investments. At the moment it is all about the risk and the returns are a distant memory.
Oct 28, 2008
Economic recession leads to dividend cuts...
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2 comments:
Dear Kevin,
if I may comment to your blog.
The returns are at the moment "a distant memory" and this will certainly remain the same within the next 6 to 12 months. But from the investor's point of view it is now the best time to buy equity, although the portfolio should be chosen very carefully, and to make use of the declining share prices by buying cheaply.
However, the economy is determined by business cycles and after a recession there always follows a boom. Hence, also the stock markets will be increasing in the long term.
Or in Warren Buffett's words: "Be fearful when others are greedy, and be greedy when others are fearful." (http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&oref=slogin)
With kind regards.
Felix
Dear Kevin,
Debenhams cut the dividends. There could be a few reasons behind:
1.They need the money to invest in a new capital project.
2.They want to expand.
3.The company did not make enough profit so will not pay the dividends to shareholders
We have to look at the past trading to see how the business was doing.
Dividend cut has bad reflection on a new investors and existing shareholders, as the reward on holding a Debenhams shares has stopped, so alternatively those shareholders can take out the money and invest somewhere else to get their return on investment.As at the moment is a recession time they have to take cautious approch.
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