Dividend Analysis

With the US financial crisis meltdown in 2009 and the on-going Europe sovereign debt crisis, dividend plays have been garnering a fair bit of attention for some time. This has resulted in a low growth and low interest rate environment and has sent investors over the globe seeking higher yielding investments.

Dividend Analysis, a new addition to ShareInvestor’s product offerings, serves to give you a sectional view of these dividend plays over a ten-year horizon.

Earnings against Dividend

Source: ShareInvestor.com

This section tabulates a company’s annual dividend payments comprising of both regular and one-off special dividend payments alongside its annual earnings over a trailing ten-year period. It allows you to study the company’s dividend history relative to its profitability at a glance.

From the chart, you can easily tell whether a company is giving consistent dividends or steadily increasing their dividend payments over time. The chart also enables you to examine the company’s ability in generating cash from its current year earnings to sustain the cash dividend payments. In addition, it allows you to easily identify companies which are giving more dividends well and above their earnings each year.

Surprising Find: Check out the dividend payment of companies like StarHub and SPH and you will find that both of these companies give out almost all of their annual earnings as dividends.

In the example given above for SPH, year-on-year, the company has fairly stable earnings (blue bar) and a big part of these profits have been used to maintain its level of annual dividend payments. This suggests that there are only modest growth opportunities for the well-established company in the current phase of their business life cycle.

Price Earnings Ratio against Dividend Yield

Source: ShareInvestor.com

This section enables you to further explore the relationship between price earnings ratio and dividend yield on the premise that reinvestment of the company’s current year earnings to generate future earnings growth has a positive impact on price earnings valuation. This is a measure of the market’s anticipation of the company’s future growth prospects and hence future returns or cash flows discounted to present value terms.

In view of the current flight to high yielding investments among investors in a historically low interest rate environment, valuations in dividend stocks could be relatively elevated. Moreover, in the discounting of anticipated future cash flows, the current lower interest rates justify for a higher price earnings ratio despite little change in the company’s growth prospects. These could possibly explain the increasing price earnings ratio as opposed to the decreasing earnings per share for the company as illustrated above in the recent three years. With the higher premium paid for the company’s shares, its dividend yield consequently decreases.

Price Earnings Ratio against Dividend Payout Ratio

Source: ShareInvestor.com

This chart allows you to study the relationship between price earnings ratio and dividend payout ratio where price earnings ratio is a function of dividend payout ratio and dividend growth rate and dividend payout is a function of expected earnings growth rate and return on equity.

In the absence of or with limited growth opportunities, high dividend payout is positively and more prominently associated with future earnings growth and hence better price earnings valuation. This is consistent with the free cash flow theory which suggests that there is a tendency of management of companies with abundant free cash flows but low dividend payout to overinvest in otherwise unwise, low-return investments leading to poor subsequent growth.

Dividend History

Source: ShareInvestor.com

This is a schedule of the company’s annual dividend payments along with the calendar period for which the dividend is proposed. Stable or increasing dividend payments over time demonstrate management’s confidence in the company’s stability and growth of future earnings and are hence preferred while dividend cuts suggest otherwise and are refrained at all costs.