Today at TILE we talked about JPM’s decision to cut its Dividend by 87% — from $0.38 to $0.05 per share. Why did they do it? Does it imply JPM is a healthy bank or an unhealthy bank?
A dividend represents the earnings that a company pays back to investors – instead of reinvesting back into the business. In this sense, the stock “yields” a cash return to investors every year (versus just creating value by increasing in price). Sometimes investors look for stocks with high dividend yields as a reason for investment.
In this context, if you increase the dividend you are sending the following message to investors: we are financially healthy, have more resources than necessary to support our growth plan, and are making a commitment to pay you a given “yield” on the stock.
In contrast, if you decrease the dividend you may be sending the following message: we can’t dividend our resources to you because we need it to maintain our financial health/keep cash available on our balance sheet and/or invest in growth. “Sorry” but you can’t count on the yield we told you to expect.
In the case of JPM, I actually think traditional rules don’t apply (as Jamie Dimon, JPM’s CEO says, “Extraordinary times call for extraordinary measures”). In this case, JPM is proactively saying we want to be prepared for: the new stress tests, the unknowns in the market, and the ability to pay back TARP funds. Before running out of money they are holding onto it – smart!
Think about decisions you make, would you splurge on a fabulous European vacation if you knew that you might have trouble paying your tuition bill? Its not that you don’t have money in the bank, its simply a choice of how you spend it. How about your health? Just because you don’t have a health problem at this moment doesn’t mean you shouldn’t exercise – preventive medicine is the way to ensure a healthy future.
In terms of the TILE community, you may want to look in your GROW portfolio and explore the number of stocks that have dividend yields – how many? which stocks? And how much cash does that generate for your expenditures or reinvestment on an annual basis? If you are dependent on this cash flow, maybe you want to do a little research on the companies or consider reallocating those funds into another vehicle (e.g. a bond) that also generates cash yields.
- Amy