Friday, February 20, 2009

Time to ditch the dividends

I wrote a couple of days ago about Goodman Fielder Ltd [GFF.NZ] using a dividend re-investment plan to help with company cash-flow in these hard times.


Let me add another string to that cashflow bow.

Shareholders in NZX listed companies should expect dividends to be cut even if profits are not correspondingly lower.

Far be it from me to suggest this because many of the companies in the Share Investor Portfolio have good dividend returns but I think it would be a prudent move for companies to lower or cancel dividend payouts until this recession comes to an end.

New Zealand companies pay handsome dividends at the best of times but as we know this aint the best of times.

The scary thought is that some companies even use borrowed money to pay dividends and that isn't wise even when the economy is ticking along nicely and will certainly be more difficult to do during this credit drought.

Unfortunately Kiwis live in some sort of dividend fools paradise where investors often gauge the investing potential of the company by that criteria alone. Company hierarchy don't often help that scenario either by pandering to that market expectation of more company moola for stockholders = a good company.

I have been guilty of this peculiar investor trait! but have learned to relax when a dividend cut is used for a more business efficient purpose-like investing moola back into the company.

Cash-flow is all important for businesses at the moment and it is normally used to pay all sorts of short term liabilities, so clearly having a bigger free cashflow will help a business function better on a day to day basis.

Just remind yourself a dividend cut will not be forever and ultimately it will be good for your investment in the long run-Warren Buffett's Berkshire Hathaway has never paid a dividend and its shares are currently traded at around US$84,000.00 each. (Its high was near double that!)

You might even like to to give your CFO a friendly phone call and gently suggest he take my advice.

Recent Share Investor Reading

Recommended Amazon Reading

Dividend Policy: Its Impact on Firm Value

Dividend Policy: Its Impact on Firm Value by Ronald C. Lease
Buy new: $36.00 / Used from: $6.19
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The Standard & Poor's Guide to Building Wealth with Dividend Stocks

The Standard & Poor's Guide to Building Wealth with Dividend Stocks by Joseph Tigue
Buy new: $18.21 / Used from: $1.60
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c Share Investor 2009