Assignment Due 10/10/2020 200-350 words
APA Format, Assignment Due 10/10/2020, Well Written, 200-350 words
The textbook for the course is Financial Management: Theory and Practice by Eugene F. Brigham & Michael C. Ehrhardt,
16th edition, published by South-Western Cengage Learning. ISBN 978-1337902601
The importance of financial planning can not be overstated. In today’s business environment, lenders and investors look more and more at the company’s internal projections as a way to isolate themselves from negative consequences down the road. There is additional pressure on companies to provide more long-term forecasts when discussing their financial statements and to be as accurate as possible. If a company does not meet its own financial plan and forecasts, it is severely punished by the financial markets in the form of sharply declining stock price and enforcement of restrictive covenants set by creditors.
As such, financial planning is extremely important not only for the company’s own internal purposes, but also the way it is going to be viewed by outsiders, creditors, stockholders and even regulators and governments. Perception is reality! With that said, consider the following scenario. It is extremely important for a company to be accurate in its financial forecasting when it comes to setting its dividend policy. A company must be able to look at its performance and income statement, forecast it for many years to come, on top of that establish its long-term cash flow (because after all dividends are paid with cash and not with “net income”) and set a consistent dividend policy that is held accountable to for many years. Does everyone remember the signaling theory? Remember the extremely negative signal a lowered dividend sends to the financial markets about a company? Consequently, when a company cuts its dividend it is normally assumed that it has forecasted its financial statements for years to come and concluded that it will not perform up to previously set operating and financial performance and will simply not have the cash to pay what it promised its investors.
Now, with that said, lets focus on this week’s discussion topic. Post the financial crisis period, or post oil/commodities bust of recent years, and the current turbulence associated with the Covid 19 pandemic, many Blue Chip companies, including many banks and oil and mining companies that were once considered the staple of dividend distribution, announced dramatic cutbacks in dividends and/or share buybacks. As expected, the markets punished these stocks severely and many of these companies that have not returned to their former dividend policies (with some moderate rise in dividend levels for U.S. bank) operate with depressed stock prices.
Your post should answer the following question: do you believe that these companies’ dividend cuts and share buybacks halt is a direct outcome of classic financial forecasting that is showing a dark future for many years to come or do you believe that these decisions are more short-term reflecting the current extraordinary economic environment then (2009) and now? Do you agree these companies have made the right move considering the punishment their stock price has suffered by the hand of investors? What other examples of companies with significant dividend distribution policy changes you can think about? What do tales like all banks overnight during the month of March 2020 announcing that they would suspend share buybacks? What do you take away from dividend giants of oil sectors suspend their dividend distributions to their shareholders?