By: Hari Wibowo
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.
