Low can also be scary.
It is often said that stocks decline for a reason. Whatever the reason might be, a stock that is down has momentum against it. It has bad news hovering. It has poor looking numbers.
Most of the time, I notice that stocks that are hovering near their 52 weeks lows also have other negative looking statistics. Sales may be down, revenue maybe down, profit may have taken a hit.
Another commonly looked measure is the dividend payout ratio. the relationship between earning per share and the dividend paid. When the dividend takes up as much as or even more than a company’s earnings, then it appears that the financial state of the company is in question.
Some companies can maintain this state for some time. One path that could be taken is to cut the dividend. However, that will likely cause some stockholders to sell their shares, putting downward pressure on the stock price. So cutting dividend is never a happy choice.
The Eternal Question
So what should one do when faced with a company whose stock is down, and whose payout ratio is over 100%?
There is no simple answer. Some investors back off, selling shares and moving on. Others just bide their time waiting for better times. Others may take the risk of buying shares.
When share prices are low, sometimes it is a smart thing to buy. At such times, any investment buys more shares than if prices were higher. More shares accumulated by dividends means more dividends and hence, later more shares. So, the thinking goes, buying when prices are low is a good thing.
Buying low is good thing, but it is impossible to tell if a company’s financial condition is about to experience a change to the positive.
As a result, buying shares is always a gamble. I try to mitigate the risk by looking at the history of the company, its industry, and other factors. In the end, however, it comes down to being comfortable with risk.
Do low prices make you run away? Let me know here.
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