Archive for March, 2009
Get professional advice now – it may save you from the Crisis
Currently more and more people are forced to struggle with financial hardship. However, fewer seem to be willing or, perhaps, simply able to contact a financial expert to get a professional advice on their finances that will assist them in such difficult times. I cannot stress it strongly enough how important the need for professional advice regarding finances is now, and believe me, it has never been more crucial than in the times of financial turbulence we are witnessing now.
Because the banking sector is under pressure too, you simply must keep your financial affairs in order and inform your bank about any change in your position. It is quite possible that if you decide to approach a bank in the future, treating is as a last resort, they will just turn you down for some sort of financial repackaging.
All too often people seem to forget that the citizens advice bureau is also available in difficult times and provide free advice and information for those struggling with any type of financial hardship. You might feel the urge to bury your head in the sand in hope that your financial problems will disappear in due course, but unfortunately this will not happen. If you act upon the first symptoms of financial trouble you are more likely to get a favorable result in the long run.
Distributions to Shareholders
A profitable company regularly faces three important questions. (1) How much of its free cash flow should it pass on to shareholders? (2) Should it provide this cash to stockholders by raising the dividend or by repurchasing stock? (3) Should it maintain a stable, consistent payment policy, or should it let the payments vary as conditions change?
In this post I will discuss the issues that affect a firm’s cash distribution policy. As we will see, most firms establish a policy that considers their forecasted cash flows and forecasted capital expenditures, and then try to stick to it. The policy can be changed, but this can cause problems because such changes inconvenience the firm’s stockholders and send unintended signals, both of which have negative implications for stock prices. Still, economic circumstances do change, and occasionally such changes require firms to change their dividend policies.
One of the most striking examples of a dividend policy change occurred in May 1994, when FPL Group, a utility holding company whose primary subsidiary is Florida Power & Light, announced a cut in its quarterly dividend from $0.62 per share to $0.42. At the same time, FPL stated that it would buy back 10 million of its common shares over the next three years to bolster its stock price.1 Security analysts called the FPL decision a watershed event for the electric utility industry. FPL saw that its circumstances were changing—its core electric business was moving from a regulated monopoly environment to one of increasing competition, and the new environment required a stronger balance sheet and more financial flexibility than was consistent with a 90 percent payout policy.
What did the market think about FPL’s dividend policy change? The company’s stock price fell by 14 percent the day the announcement was made. In the past, hundreds of dividend cuts followed by sharply lower earnings had conditioned investors to expect the worst when a company reduces its dividend—this is the signaling effect, which is discussed later in the chapter. However, over the next few months, as they understood FPL’s actions better, analysts began to praise the decision and to recommend the stock. As a result, FPL’s stock outperformed the average utility and soon exceeded the preannouncement price.
Overview of the Dividend Policy Decision
In practice, dividend policy is not an independent decision—the dividend decision is made jointly with capital structure and capital budgeting decisions. The underlying reason for joining these decisions is asymmetric information, which influences managerial actions in two ways:
- In general, managers do not want to issue new common stock. First, new common stock involves issuance costs—commissions, fees, and so on—and those costs can be avoided by using retained earnings to finance equity needs. Second, as we discussed previously, asymmetric information causes investors to view new common stock issues as negative signals and thus lowers expectations regarding the firm’s future prospects. The end result is that the announcement of a new stock issue usually leads to a decrease in the stock price. Considering the total costs involved, including both issuance and asymmetric information costs, managers prefer to use retained earnings as the primary source of new equity.
- Dividend changes provide signals about managers’ beliefs as to their firms’ future prospects. Thus, dividend reductions generally have a significant negative effect on a firm’s stock price. Since managers recognize this, they try to set dollar dividends low enough so that there is only a remote chance that the dividend will have to be reduced in the future.
Professional advice job offer
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