wHAT ARE SOME OF THE REASONS THAT A COMPANY WOULD SIGNIFICANTLY REDUCE ITS DIVIDEND?

Answer 1

The direct reason is a decrease in net profit. Another reason is to reserve cash for new development in near future. But companies with steady growth may also pay out low dividends, for more details please read this, it talks about the tax aspect as well:

http://www.dows.com/Publications/InvestingForTotalReturn.htm

"...a stock with a lower current dividend yield usually has this lower yield for the two opposite reasons: (1) The investment opportunities for the company seem so promising that the board of directors determines it in the best interest of the shareholders to plow back the greater part of earnings into the expansion of the company's business; hence, the dividend payout is small as a percentage of total earnings. (2) The price of the stock is relatively higher, reflecting the investment community's assessment that the prospects for the company are indeed promising and/or the element of risk is small."

"...At the federal level, dividends are presently taxed as regular income with rates that go as high as 39.6%. In contrast, capital gains on stocks held more than one year (long-term) are taxed at a maximum rate of 20%. Furthermore, while dividends are taxed in the year earned, capital gains are not taxed until a security is sold which may effectively defer taxation many years beyond the year in which such gain is actually earned."

Answer 2

The first two reasons: (1) they didn't make enough to pay a dividend, and (2) they want to use the money for some expansion or action to sustain or improve profitability. Not always is this because the company is "on the ropes" financially. Sometimes, when a single family owns a substantial share and they don't really need the income, the would-be dividend funds are better than borrowing to build that new thing they have in the works.

Answer 3

The main reason is poor profit. The company simply did not make enough money to pay out the same dividends they did last year. However, there are a couple of others, and these are usually good news.

The company want to expand, purchase a competor, launch new products, or increase R & D to fasttrack a new product.

All of these are very expensive, and the company may have decided that it would be better to fund these activites internally, rather than take on more debt.

You will need to review the company's balance sheet, and read it's annual report to detemine the exact reason.

Answer 4

The market tends to punish companies who reduce their dividends. -- causing an abnormal loss of over 6% (on average). Therefore, companies do everything possible to avoid lowering their dividends. Many firms will go so far as to take on debt to avoid lowering dividends.

Needing cash for operations is rarely a reason to cut dividends for healthy companies. They will have access to other funds, and will not need to cut them.

If a company significantly reduces its dividends, it is a sign tht the company is in serious trouble.

Answer 5

Usually in slow growth sector, companies would prefer to pay dividend to boast up their stock prices. In a faster growing industry, companies prefer to maintain their cashflow stability than paying out (usually because its a start up and need cash or they are saving up for investments)

Also, some tax law prevent the beneficiaries from fully enjoy the dividend as most of it will go to paying tax, so shareholder vote not to issue dividend.

A very good example for you would be Kodak. In 2004, they wanted to reduce dividends so that they can conserve cash for investments into new technologies like digital cameras. But long term shareholders revolted as they want the company to continue as it is and continue to issue high dividend. In sunset industry, often, the gross revenue are lower BUT usually with high margin as competition starts to exit.