A dividend is the portion of the profit company distributes to its shareholders. Organizations usually pay a dividend from quarterly or yearly depending upon the financial health of the organization. It’s always been an indicator of the financial wellbeing of the company and proven as a critical factor to attract investors. The dividend payment is not a mandatory requirement for the organization, as some of the organizations use this portion to reinvest in the growth of the organization.
The dividend payment amount grows with the growth and stability of the Organization. So most of the mature organizations increase the dividend payment portion to boost stock valuation. The dividend discount model is a globally accepted process to enrich market capitalization through enhance stock valuations.
A dividend cut or hold happens when an organization decides not to allocate the amount for distribution to shareholders. There are a few possible reasons for the dividend cut. The primary reason could be, the company wants to retain that amount to reinvest in the company to improve the financial need for growth. A secondary reason could be declining financial health. A major difference between primary and secondary situations is, in the primary company is doing well and they want to proceed for a bigger vision of expansion. In secondary, the financial stability and growth get impacted and they can’t afford to pay the surplus to shareholders rather than using that for supporting the business.
This is pretty interesting ready to understand that if an organization is financially distressed, they can’t afford to make dividend payments. Mostly the dividend payment is done from the earning of the organizations. So if an organization is in financial distress means they have poor cash inflow. If still they pull money from the poor earning or non-earning sources, it will put the organization in compromise status. None of the organizations prefer to pay a dividend to look good in front of a shareholder by putting the entire vision of the organization on stake.
Pandemic/catastrophic events make it worse. So if an organization is already struggling with the cash inflow but with a high possibility of recovery get negotiated if a pandemic or catastrophic hit the economy. Usually, these events put a negative impact on the market due to its uncertain nature. These events usually unpredictable and lack of proper provisioning make it more threatening.
Next thought in line is if these situations impact the investors of the organization? If yes, then how?
An organization who is either issuer of debt/loans or equity has lot of stakeholder’s investors. The investment of these investors is directly linked with the performance of the organization. In another way, if the organization is a counterparty, they might be involved in a big financial transaction like credit swap or institutional loans.
So these investors need to know the financial conditions of these organizations and especially big investment firms or mutual funds need to track the performance of the organization where dividend payment can be a crucial indicator.
As briefly discussed, we know that dividend cut could be an indicator of the risk of financial loss but not the exact reason always. So how can an investor identify the real reason and impact of a dividend cut?
These financial decisions need lots of analysis based on financial data gathered over decades. We can’t just look at the dividend cut-outs and assume that the organization is in financial distress and as investors we should keep our money away from these organizations.
Xoriant CDi can assist organizations who need proper evaluation of any financial institution to evaluate risk in their portfolio. Xoriant CDi has a data lake with extensive research reports and data research from industry experts. These data points are well maintained and stored in a standard format that is being accepted across industry and market. We track the dividend payment model and research to understand the financial conditions of the organization through our corporate action model. We are serving organizations for decades with needs in the same line. We have a great establishment in the industry.