Forward-Looking Dividend Analysis
August 24, 2016
Historical information allows us to analyze dividend growers and cutters, but how can we strategically leverage this information to look into the future? There has been a disconnect in the market between backward-looking analysis and the ability to identify future dividend growth potential. While there is certainly some consistency in companies’ propensity to pay dividends just because they have paid dividends in the past, it does not mean they will continue to do so. Historically healthy companies might announce dividend cuts and newer dividend payers might announce dividend increases, offering opportunities for investors and managers able to look forward to predict such changes.
Rear-view dividend growth investors would have largely been hurt by major industry changes affecting dividend paying companies. Bank stocks for example were battered in the financial crisis spanning 2007-2009, where most banks were forced to completely eliminate their dividends. Similarly, many oil and energy stocks significantly cut their dividends in 2015 as oil and gas prices plummeted, effectively driving a number of energy companies out of business. More strikingly, these stocks did not only cut their dividends significantly but also saw a corresponding drop in stock price. These cuts and negative performance came despite quarters and even years of consistent dividend increases, a real case of past performance not being indicative of future results.
By taking a future-looking approach to dividend analysis, investors can seek to effectively navigate many of the pitfalls associated with dividend growth investing. Please see our whitepaper, The Reality of Dividend Growth Investing: Accessing the Future of Dividend Growth, for more information.