Reading 55 Hi When evaluating corporate credits, why do the rating agencies consider dividends non-discretionary? In theory, isn’t a company choosing to pay dividends each period? Shouldn’t this be treated similarly to an acquisition or asset disposal? Why is there a distinction (per their methodology) between Free Operating Cash Flow and Discretionary Cash Flow? Aren’t both uses discretionary? In the book it goes like this … Operating Cash Flow -Capex Free Operating Cash Flow -Cash dividends Discretionary Cash Flow -Acquisitions +Asset disposals +other sources -other uses Pre-financing Cash Flow Thank you D.
Though you are totally correct that Dividends should be adjusted at the level same as of the Acquisitions and Asset disposals are… but, this model is specific to what S&P uses for corporate credit rating http://www2.standardandpoors.com/spf/pdf/fixedincome/CorpCrit2003r-jun.pdf Page-31 - See how they have measured cash flows for the XYZ Company. Even I was hit by the same though when I first read that reading so did some googling and finally figured it out.