What Is a Dividend Cut?
Many companies offer dividends to their shareholders. However, if the company experiences financial problems, it may implement dividend cuts to raise its net income. When this occurs, shareholders may lose faith in the company and sell their shares, or they may hold their shares and wait for the company to recover.
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Dividends
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Dividends are profits that companies pay to their shareholders. These profits may be in the form of property, stock or cash. A company's board of directors determines the amount of dividend that it will pay to shareholders, and the company typically quotes this amount in terms of dollars per share. Companies may also quote the dividend amount as a percentage of the stock's current market price.
Dividend Cuts
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A dividend cut occurs when a company's board of directors decides to reduce the dividend it pays to shareholders. Companies typically implement dividend cuts when their profits fall or their debt ratios become too high. Dividend cuts may be temporary, or the dividend may continue to decrease. If a company's board of directors decides to implement a dividend cut, the company will typically reduce dividend payments at the beginning of the next quarter.
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Implications
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Stable companies often pay dividends to their shareholders regularly, and many shareholders depend on dividends as a consistent source of income. When a dividend cut occurs, some shareholders consider it a sign that the company is going to fail and they may decide to sell their shares and reinvest elsewhere. However, other shareholders may consider dividend cuts to be evidence that the company is proactive about protecting its profits.
Considerations
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Though many investors consider steady or increasing dividends to be a sign of company stability, some struggling companies may continue to pay their dividends using borrowed funds when they should have implemented a dividend cut. In some cases, dividend cuts can save a company from bankruptcy by allowing it the capital it needs to recover. In fact, some investors may consider dividend cuts to be a buying opportunity.
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References
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