Question

Given the current unprecedented Covid-19 environment that we have been exposed to since earlier this year, in Australia we have seen some of these large, mature companies reduce, defer or even cancel dividends that they otherwise would have paid to shareholders. Comment on what the reaction has been by the financial press / journalists / academics to such decisions of these firms. Reconcile your discussion with what outcomes would be expected to arise when applying general finance principles consistent with the discussion in the course materials.

Answer 1

Companies has been cutting onto the dividend since arrival of coronavirus because they are highly sceptical of their growth in profits and they are wanting to retain higher amounts of their profit in their own hand rather than paying those profits as dividend to the shareholders so they are trying to cancel their dividend and these are leading to a negative reaction to the share price because people are highly sceptical about the growth rate of the company and the profits of the company in this grim financial situation so they are trying to offload their shares in order to protect themselves

Reactions of the financial press journalists and academic to such decision of the firm will be that this can lead to a sharp cut in the share price in the short run, but in the long run this will be beneficial because the company can protect itself and survive through this adverse economic cycle to to help itself grow in future.

Generally cutting of dividend will mean that company is trying to preserve it's profit for the adverse economic times because company is not sure about the future profits and hence it will be leading to a negative sentiment all across the market and cutting off the share price because investors will be dumping of their stocks and this should be done by the company from a company's perspective to survive in the long run as they can face various issues like liquidity risk management and solvency crisis and financial cost going up due to mismanagement of funds . So, a company should always try to preserve itself to manage the dividend according to the need of the company rather than looking at the share prices.

Financial principle of consistency is to be followed by the firm but nothing is important than survival and existence so dividend can be shortened inin the short run in order to maximize the benefit in the long run.