Novice Investing - Signs of Dividend Cut

Date: Sunday 20th 2008f July 2008 12:51:18 PM

Signs of Dividend Cut - 11/25/2005

By: Hari Wibowo

In Continuation of an article Don't Just Pick Any Dividend, let me follow up with a few signs of company who may initiate dividend cut. Once dividend payment is initiated, management will be less inclined to cut them. Certain circumstances might force them to cut the dividend. Yes, it is embarrassing. But, it may be needed to survive. Business may be slow. Debt payments may be coming due. Whatever it is, dividend cut generally is not a good thing.

Here are several indications that management will cut future dividend:

Huge Loss. When a company is not profitable, dividend cut may be initiated. If the loss occurred for years and no sign of improvement for the foreseeable future, the chance is, dividend will likely be cut.

Negative Net Cash. This means that the company has more long term debt than it has cash. If the firm's negative net cash is increasing and getting worse, the dividend cut will follow suit.

Negative Cash Flow From Operations. When the company is draining cash operating its business, there is no reason it should keep the dividend payment. The cash can be used for other purposes such as capital expenditure or investing in long term asset to expand its business.

Long Term Debt coming due. If a big portion of the company's long term debt is coming due, it needs to conserve cash. Even if the firm cannot repay it on time, lenders want to see an effort by the company to conserve cash. To please lenders, the company needs to reduce dividend payment and request an extension for the loan.

If a company has one of these signs, they may not cut their dividend anytime soon. But if a company has all these signs, there is a big chance that dividend cut is the next logical stop. What company currently fit this description? General Motors Corporation is one. It has a huge loss of $ 3.81 Billion loss for the first nine months of 2005. Furthermore, its balance sheet is not stellar. It has a huge negative net cash ($ 31 Billion) and cash flow from operation is negative as well. I am not sure when GM's long term debt is coming due. If a huge portion of it comes due, dividend cut will be initiated if its business does not turn around.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities.

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