In Continuation of an article 'Signs of Dividend Cut', let me
follow up with a the other side of the coin. Companies can also
initiate a dividend increase. In fact, plenty of successful
companies, always deliver dividend increases year after year.
There are plenty of reasons for dividend increase; management
ego, financial strength, inefficient money management. Whatever
it is, dividend increase is normally a good sign for publicly
traded companies.
It is true that dividends are taxed twice; once at corporate
level and another one at individual tax filing. However,
companies that pay its dividend can't lie about its profit
figure. Money received by shareholders is money that is obtained
from the corporation. Without increasing profit, corporation is
less likely to raise dividends.
Here are several indications that management will raise future
dividend:
Increasing Cash Flow From Operations. When cash inflow is
positive and increasing, it will pile up in the balance sheet.
One way to reinvest the cash flow is by distributing it as
dividends to shareholders.
Positive Net Cash. If a company is increasingly
profitable and has positive net cash on its balance sheet, the
chance is those cash will be distributed to shareholders in the
form of higher dividends.
Low Capital Expenditure. When the capital expenditure
requirement for a firm is low, the company has more cash to use.
Furthermore, if the business operation generate more and more
profits, there is no reason why management should withhold the
cash.
No Acquisition Target in sight. A company may decide to
accumulate cash in advance of future acquisitions. However, if a
company operates in an industry where no acquisition target in
sight, it will eventually raise its dividend to distribute the
extra cash to shareholders.
Overvalued Stock Price. Smart management know how to best
use its resources. When the company's stock price is overvalued,
it is not wise to buy back its own shares. With profits piling
up and cash left unused, the only sensible way is to raise
dividends.
While most of the above criteria are important, the most
critical requirement for a dividend raise is increasing profit.
Without profit, the company has no resource to do anything.
Therefore, if you want to invest a company who will raise its
dividend, consider buying a stock of a company that is highly
profitable and is expected to increase profit for a long time.
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