What are some generic indicators to look for that would indicate that a company that does not currently pay a dividend may be in the position to start issuing one in the near future. I imagine It would be a function of financial ability and proper motivation to pay one in the first place. With financial ability I would look to the tajectory of cash availablity, the phase of the industry, and stability of the the company’s place in the macro environment. For motivation I suppose I would look at how the company is making returns to investors (share buybacks?) and if paying the dividend will indeed create the most return for the shareholders.
What I have said is very vague. I was wondering if there were some specific items analysts tend to look for. Perhaps it is very much a case by case basis with no checklist of indicators.
Will future cash flow be enough to support the dividend?
Is it in an industry prone to attracting yield investors (telecom, utilities, etc.)?
I own a couple of stocks I think will resume dividend payments at some point, causing them to more than double if that occurs. I have avoided the MLPs so far but any that cut dividends and don’t go bankrupt will eventually resume the dividend. I think there are easier plays outside MLPs though.
Theoretically, a company should start paying a dividend when it’s ROE starts getting close to the cost of equity, so you’d probably look for declining ROE. My guess is that management tends to overestimate the return on productive investments so an ROE that gets close to the total return of an industry index is not a bad benchmark.
Whether the practice lines up with the theory is hard to tell, but presumably could be tested on data if one wanted to go through the effort of collecting it. My guess is that management pays dividends for a lot of reasons that are not corporate finance related. Declining growth rates may scare away some investors and so issuing dividends may be a strategy to attract new replacement investors.
Tax rates for dividends vs. capital gains. No change in that now, but a few years ago many companies issued dividends before the rate went up. These were often times special dividends though vs. recurring.
Large share ownership w/ partner. Example: If ABC company has 45% of XYZ stock, but bylaws/regulations/laws/etc. prevent or discourage ownership beyond 50%, a company will begin paying dividends instead of increasing share repurchases to keep ABC’s ownership below some threshold.
Not sure how to find or track that, but aside from the general “established company w/ lots of cash” type of things to look for, this indicator is pretty interesting.
I have never got a solid answer from anyone on the whole tax rate arguement on dividends vs buy backs. If you hold the stock more than 1 year to get the lower capital gains tax, aren’t you also receiving a qualified dividend and receiving the lower rate as well?
The only real difference I see is that you are not able to determine the date at which you are paying taxes, the rate would be the same. Someone please correct me if I am wrong.
All of these answers are good for academia but in the real world the way it works is:
Company went through some issue that prevented the dividend from continuing, dividend is cut
Company cleans up its act, now has robust cash flow and no productice place to deploy that cash given industry maturity
Given the predictability of the cash flow, the company then resumes the dividend
It’s a business analysis problem more than a corporate finance textbook problem. A lot of times you can call the company in question and they will walk you through how the dividend gets reinstated. It’s not rocket science.
To add on to bromion’s point, if the company never paid a dividend before you could look at a company that used to be a high growth company that is in the process of entering maturity. At that point with slowing growth typically they will start to be more agressive at returning capital via buybacks & dividends.
That’s true, but the thing about slowing growth is they are more likely to go out and buy a “high growth” company and destroy capital, at least among small caps. Big companies understand WACC and ROI and have huge divisions of finance nerds to crunch it out, small companies often shoot from the hip. That is why among small caps I typically prefer companies with modest net debt. The cash heavy low EV relative to market cap stocks are often a ironically a worse investment than companies with moderate debt.
Very helpful, thanks everyone! I will let you know if I happen to dig up something interesting. There is at least one candidate I already want to look at.
If you consider that the OP’s question is when does a company decide to issue a dividend when it hasn’t given one in the past, this post can be summed up as:
"All of these answers are good for academia but in the real world the way it works is:
The academic answer: (Company now has robust cash flow and no productice place to deploy that cash given industry maturity)"
Just curious. Why would paying a dividend suddenly cause a company to double (assuming that earnings or cash flow don’t double before the dividend is reinstated)? Is it just that dividend investors will jump back in and demand for the stock will skyrocket?
Or is it that because they are resuming a dividend, it’s a bit like a bond that’s suddenly been upgraded from junk to investment grade?
It depends. A lot of microcaps feel that somehow paying a 1% dividend is going to attract and retain a shareholder base. A number of companies use this as some kind of weird rationale for not buying back their own stock or paying out a one time lump sum via special dividend. I had a company tell me they don’t “get anything” from paying a special dividend. It’s not your cash MOFO, it’s mine, pay it out.
If it’s a wussy dividend, that does virtually nothing. A 1% yield does essentially nothing for anyone.
However, if the company has a certain fixed payout ratio relative to earnings, then perhaps they will pay a large dividend if the earnings increase significantly. Let’s say you have a $2 stock and the way the earnings math is going to play out implies the company will start paying a $0.20 dividend. The stock will not trade at a 10% yield if that is sustainable. It will instead at least double to perhaps 5%.
There are not many stocks like this in the market obviously but there are a few. It takes both a structurally attractive setup at the company level, as well as a management team that understands math. Most S&P 500 stocks already pay a dividend and most small cap management teams don’t understand the math, usually preferring instead to try to grow the company organically or inorganically. Some companies shouldn’t be grown or can’t be grown.
So yes, basically what you said. At a minimum, the algos will pick it up and the share price should correct to the new yield immediately. Algos are like a roaming pack of cyber wolves set to kill based on specific criteria but you can use that to your advantage as well. There are good trades in things like busted REITs and MLPs. I had a good return on CCG this year even though they never ended up reinstating the dividend and the company decided to sell itself for too low of a price.
historically, high dividend/distribution yields are typical of fraudulent or wildly overpriced companies/stocks. see every stock company that existed before 1850. part of that tradition carries forward to today. morons, in 1700 and today, like high dividend yields, thinking that somehow an excessive dividend has no effect on the underlying business. some morons also work for large asset managers and seem to disregard cyclicality as being a natural, or at least predictable, occurence, thinking that because a high dividend is payable today it will be payable forever.
You also have to look at industry valuations. If valuations are down across the industry and they have the cash for a dividend they may opt towards acquistions.
I wanted to take a look at JBLU. I understand the trepidation about their long term debt but the overall situation they find themselves in makes me curious. It has been a stock on a grand momementum run this year… and rightfully so. They have managed to more than double their operating and net income over last year. It is also worth noting that during this expansion and incrase of PP&E they have simultaneously and consistantly decreased their debt… not bad. They have even taken advantage of the cheaper fuel to actually make prepayments on debt. All of that being said, the growth strory is over as is evident with a peaked out and now declining PRASM. Given the industry can maintain discipline and continue to stay profitable and “at peace” with each other, JBLU will continue to do well. I thought now that the expansion is over they could be more like their mid cap industry peer (ALK) and issue a dividend…to keep currently disappointed investors interested in staying around since it is not for the stelllar growth story anymore.
That is the back story and big picture, but not sure that the numbers add up to JBLU being motivated to issue at this point. While even with interest rates rising I am sure JBLU can manage their debt load efficiently, the variable of how much their payments will increase on floating rate debt is uncertain. I want to compare some ratios to ALK, if anything, just for the learning experience. They have been an interesting company ot watch up to this point.