Question

Key words and Definitions

Payout policy – the firm’s typical method of distributing cash to shareholders.

Dividend signaling – the theory that a firm’s dividend policy provides information to stakeholders.

SEC – the Securities and Exchange Commission is the federal government entity charged with protecting investors and with financial oversight of public firms and the financial markets.

Summary: Key Points in the Article.

Kraft Heinz shares were down by as much as 20% after the market closed. The firm wrote down the value of both Kraft and Oscar Mayer brands.by $15 billion after posting a $12.6 billion loss. In addition, the firm slashed dividends from 62.5 cents a share to 40 cents a share.

The dividend cut will allow the firm to “cut debt faster, improve the balance sheet” and allow Kraft Heinz to sell some business units. The company also announced the Securities and Exchange Commission was investigating various vendor relationships. Kraft Heinz stated it was fully cooperating with the investigation and the company launched an internal review of its procurement procedures.

Thinking Critically Questions:

1. What signal does a dividend cut send?

2. Why did Kraft Heinz cut dividends?

3. Why is Kraft Heinz selling some business units?

Answer 1

The above questions can be answered as follows:

1. The Dividend cut sends out the signal, that the company is making losses and is currently not able to pay the Dividend at 62.5 cents/share as before. This maybe due to the lack of fund in the company due to the loss occurred in the current year.

The Signal for the shareholder will be that the company is not doing well in the current year and therefore there have received a dividend cut of 22.5 cents/share. This may cost the company to loose faith of its stockholders and they might start selling off their shares.

2. Kraft Heinz cut dividends this year, as the company had occurred a Business loss of $12.6 Billions. Also, because of their market value going down, they have lost brand value of the company, so in order to manage the cashflow and Balance Sheet of the company, it decided to cut the Dividend payouts.

3. The company has occurred a loss of $15 Billion and the Market Value of the company has reduced by 20%, this indicates that the company is not doing well and is not able to manage the business properly. Therefore, it is planning on selling the business units, so that they can be managed by different efficent companies in the market.