Are there early warning signs of a company’s decline? Or at least of dividend stagnation?
Reality
There are always signs, but are these signs significant? Every company goes through ups and down, so any one or group of signs are usually not definitive.
When we look back at many company histories, we can easily point to some events, and say “Aha!”. But if we look further we can see such signs in many other companies that survived and even later prospered.
And What About Dividends?
Here the best summation is from Investopedia:
“Companies that reduce, or eliminate, their dividend payments to shareholders are not necessarily on the verge of bankruptcy. However, when companies go through tough times, dividends are usually one of the first items to go. Management is not likely to cut a dividend unless it’s absolutely necessary since any cut is likely to send the company’s stock price down significantly. As a result, view any dividend cuts or the elimination of a dividend as a sign that difficult times lie ahead.”
So can we associate dividends to the canary in the coal mine? A cut dividend is certainly a sign of tough times. But some companies can bounce back after a cut, some do not. So a dividend cut is not always a black-and-white sign of imminent bankruptcy. Many banks were forced to cut dividends as a result of the Great Financial Crisis such as Bank of America and Wells Fargo, but many climbed back.
Other signs
Some other signs may require more in depth research. A slowdown in sales, higher than normal costs, significant regulatory actions, lawsuits, and so on, all can drag a company lower. But will it cause a collapse?
It has been noted that if a large proportion of a company’s income is based on its financing of customers’ orders, a large risk looms.
Classic signs
Some classic signs to be alert to include: a rapid deceleration in earnings per share is a common warning sign; a rapid increase in dividend payout ration over 100%. And there are numerous others to consider.
But since no one specific sign is a sure fire marker prior to collapse, we might remain vigilant and flexible.
What signs do you look out for? Let me know here.
Flowering Purslane from 2024.
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