How To Predict If A Company Will Eliminate or Cut Its Dividend

If you own dividend-paying paying stocks it may be a good time to get out the cash flow statement for each company and review it. As interest rates rise, financing for companies with large yields may dry up. So you want to make sure that the company can generate enough cash from operations to pay the dividend.

A lot of investors look to net income for the dividend coverage however net income is not cash flow. The first step is to go to the section of the statement of cash flows entitled net cash provided by operations. The second step is to compare the cash flow from operations to the distributions or dividends that are paid. You can find this number by looking at cash distributions or dividends under the financial activities in the statement of cash flow. The third step is to compare these two numbers over the last 3 or 4 years. If you see a particular year with a very low operating cash flow it could be from a large change in working capital that is not recurring. This is why you look over 3 or 4 years.

If you see a large discrepancy where the dividends or distributions are much higher than the operating cash flow in the last year or over a number of years it’s time to get concerned. A good example of a company that recently eliminated its dividend unexpectedly is Stonemor Partners. In late 2016 the stock fell from the mid-20s to 5 as the company unexpectedly eliminated its dividend. Here is a pdf copy of Stonemor Partners Statement of Cash Flows for the past three years.  As you look at the net cash provided by operating activities over the previous three years you’ll see that it’s substantially lower than the cash distributions. The cash to make the distributions came from issuing new equity, not from operations.

So I suggest you look at the statement of cash flow for the stocks that are currently paying you a dividend. This simple analysis can save you a lot of future anxiety and lost capital.