Question

In: Finance

Find an example of a company that recently decreased its dividend, give a brief discussion of...

Find an example of a company that recently decreased its dividend, give a brief discussion of the situation, and how the stock has fared since.

Solutions

Expert Solution

Generally, a dividend cut is observed in the market as a bad signal about companys ongoings. but this can be a broad generalizations, and each of such case has to be examined thoroughly considering overall financial performance, market condition, etc - in order to reassess whether such dividend cut indeed signals bad situation of a company.

Taking an example, GE General Electric has a record of announcing dividend cuts.
Just after financial crisis, GE announced dividend cut amounting to $8.6 bn in year 2009, just after financial crisis.
Recently, in November 2017, GE announced dividend cut of 50% amounting to a value of $4.1 bn. Earlier it used to give away 24 cents a share. After this announcement, it has been decreased to 12 cents a share.
Brief context :
Generally, in course of a company's business, it plans out its revenues, money inflows, under certain assumptions which indicate how a market would turn out in future. Based on that a company drwas its projections. Projections are always based on sales growth assumptions, market condition assessments, etc. Based on this - futher expansion plans are drawn out. Given a certain period's actual performance, the company recognises its cash inflows, services its debt, gives away dividend payouts, finalises further budjeting to accommodate its future plans.
In this case about GE, market conditions dit not turn out as per its projections. THis put pressure on its cash position. It has announced dividedn payout plan, as per its initial growth plan. it couldnot grow in sync with its plans. Due to which raising capital bacame difficult. as debtors watch free cash flow, and cash position of any company.
There is another view which says, if overall earnings are seen in comparison with the market, GE's situation is positive, given its earnings are good.
Observing how GE stock has fared historically, since November-2017 dividend cut annoucement (marked with a red arrow), the stock has been on a downward trend.



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