Dulton Group: Information Content Of Dividends

by Charmaine Ramon - Date: 2010-09-12 - Word Count: 329 Share This!

Dulton Group helps you to analyze the information content of dividends, an important factor affecting dividend payout policy. The implication is that the company's board of directors and/or management uses its dividend policy to signal investors about how the company is really doing. Members of both the board and management are, after all, the ultimate insiders of the company. No other party has better information regarding the future and earnings and cash flow of the company.

An interesting perspective towards dividend declaration is that it can resolve some information asymmetry between insiders and outsiders. Therefore, a company's decision to initiate, maintain, increase or decrease dividend can often convey much more information than financial statements and words.

Good examples of these are the companies that take pride in regularly increasing their dividends over a long period of time. It is a very good way to convey two messages to the shareholders. Firstly, the company is expected to do good in future years. Secondly, the investors are assured that management has a desire to share its increasing fortune with the investors.

Companies that constantly increase dividends seem to share certain characteristics:

Niche or dominant position in the industry in which they operate; in Michael Porter's term, they have competitive advantage.
Global operations.
Relatively high ROA (Returns on Assets)
Relatively low debt ratios. Companies with low debt ratios are unlikely to be affected by unfavorable debt covenants.

Dividend cuts or omissions present a powerful signaling component. For many companies in financial distress, the dividend declaration date is viewed with more than usual interest. In some instances, tough, management can cut dividend to send a positive signal to the investors. It shows availability of positive NPV investment opportunity of the company.

For these reasons, merely getting dividends is not enough. Smart investors know what information is deliberately supplied with the dividends. After all, informed investors are the winners in the long run. Dulton group assists you to get the maximum out of your investment by utilize all the information available.

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