Dividends and Earnings Per Share
Discussion
I'm sure this is a stupid question, but could the financial gurus of PH humour me please!
I work for a multinational company in the oil & gas industry, not in finance I hasten to add. The last few years have been tough, but by and large we have remained profitable.
To keep the market happy, the company has kept the dividend at pretty much pre-crisis levels (approaching 4% of the stock price, annually). In recent quarters, the dividend has been greatly in excess of earnings per share.
Internally, the management are talking about little other than cash flow, placing restrictions on spending and insisting that we get paid quicker. All fair enough if a little frustrating, but surely returning more than what you're making to shareholders is likely to cock up your cashflow more than anything else?
It seems blindingly obvious to me, but I'm a layman financially, hence the post.
I work for a multinational company in the oil & gas industry, not in finance I hasten to add. The last few years have been tough, but by and large we have remained profitable.
To keep the market happy, the company has kept the dividend at pretty much pre-crisis levels (approaching 4% of the stock price, annually). In recent quarters, the dividend has been greatly in excess of earnings per share.
Internally, the management are talking about little other than cash flow, placing restrictions on spending and insisting that we get paid quicker. All fair enough if a little frustrating, but surely returning more than what you're making to shareholders is likely to cock up your cashflow more than anything else?
It seems blindingly obvious to me, but I'm a layman financially, hence the post.
It's a complex web. If they stop paying dividends, their share price will fall, people will get nervous about their stability, their credit rating will fall, their interest bill will rise. It'll get harder to raise new capital.
You're right to ask. So often people assume that things they don't understand are perfectly simple. As if they think the people running it are too dumb to understand the simplest idea. On PH, normally followed by a headbanger icon.
You're right to ask. So often people assume that things they don't understand are perfectly simple. As if they think the people running it are too dumb to understand the simplest idea. On PH, normally followed by a headbanger icon.
Thanks for the responses.
borrowing cash to pay the dividend. Reading into your statement above, presumably the company was able to borrow this cash at a reasonable rate because of its good standing, which is directly related to the continued dividends?
otherman said:
It's a complex web. If they stop paying dividends, their share price will fall, people will get nervous about their stability, their credit rating will fall, their interest bill will rise. It'll get harder to raise new capital.
Yeah I understand there are a lot of reasons to keep paying dividends, although presumably analysts will also notice that the company is - in effect -borrowing cash to pay the dividend. Reading into your statement above, presumably the company was able to borrow this cash at a reasonable rate because of its good standing, which is directly related to the continued dividends?
otherman said:
You're right to ask. So often people assume that things they don't understand are perfectly simple. As if they think the people running it are too dumb to understand the simplest idea. On PH, normally followed by a headbanger icon.
Indeed, the company is run by people a lot smarter than me, and I'm sure there is method in the apparent madness!Also it's worth bearing in mind that there's a difference between earnings and cash flow. As you mention in your post, improving working capital management (i.e. reducing the time it takes for customers to pay) is good for cash flow but basically neutral on earnings.
Similarly, they might decide to postpone capital investment (which goes through the CF statement immediately but through the P&L over several years) to improve cash flow. That could be bad for the business in the long run if it becomes under-invested.
Similarly, they might decide to postpone capital investment (which goes through the CF statement immediately but through the P&L over several years) to improve cash flow. That could be bad for the business in the long run if it becomes under-invested.
Not a stupid question at all.
Multinational; oil & gas; quarterly dividends; maintained dividend - I wondered if your employer might be either Shell or BP, but no, their dividends are 6.2% and 6.3%, not 4%.
With Shell, the answer to your question would be simple.
They have not cut their dividend during the last (about) 45 years. Would you want to be the first CEO to make a cut?
They have the scale to pay a dividend greater than earnings for a while.
There was confidence that the supply/demand balance would eventually return to a better position, and that has indeed now happened. I think their earnings are probably now in excess of the dividend.
Whenever a dividend cut happens, investors worry and usually the market value suffers. Predators might begin to take interest.
Jambo85 said:
Internally, the management are talking about little other than cash flow, placing restrictions on spending and insisting that we get paid quicker. All fair enough if a little frustrating, but surely returning more than what you're making to shareholders is likely to cock up your cashflow more than anything else?
Dividends are attractive to investors. If they mess with the dividend they stand to lose investors, which has the potential to significantly impact share price. And share price is king to senior management.So - in the short term - the market (investors) may be more favorable to a company that maintains/grows their dividend, and minimizes the impact to their balance sheet by looking for other ways to offset the cost (as best they can) of the dividend (sell non-core assets, reduce spend, chase payments, renegotiate service provider contracts, etc.).
For a company with low (and cheap) debt, this can be the best strategy. And many global oil and gas companies have excellent credit ratings, so borrowing is cheap.
Obviously this is a short term solution. Ultimately outlay has to decrease (perhaps major capital projects are coming to and end and beginning to return on their investment?) and the company generate enough cash to cover the dividend and all their operating costs.
To add to the helpful comments above, senior managers are often paid partially in share options, so part of their current and future wealth is tied to share price. No FD/CFO wants to be responsible for reducing the wealth of themselves and their colleagues in the boardroom.
Also, when oil prices fell in 2015, it was widely viewed as a temporary and unsustainable drop, and expected to return quickly to prior levels - the world seemed to function pretty well with oil at USD100. In that context, Shell et al, didn't want to be the first to blink, and drop the dividend.
Also, when oil prices fell in 2015, it was widely viewed as a temporary and unsustainable drop, and expected to return quickly to prior levels - the world seemed to function pretty well with oil at USD100. In that context, Shell et al, didn't want to be the first to blink, and drop the dividend.
Thanks again. I suppose it's mostly as I thought, all makes sense, but the needs of shareholders are tough for the man on the ground to accept sometimes.
About the company - it's not an oil producer, so no correct guesses so far
Also earnings don't respond to increases in oil price as immediately as we'd like. And my 4% figure was a finger in the air approximation! I'll leave the clues at that I think!
About the company - it's not an oil producer, so no correct guesses so far
Also earnings don't respond to increases in oil price as immediately as we'd like. And my 4% figure was a finger in the air approximation! I'll leave the clues at that I think!Jambo85 said:
About the company - it's not an oil producer, so no correct guesses so far
That's easy. Your company is reinvesting into its own business and/or customers are slow to pay their bills so your company has a cash flow problem.Many companies which go "bust" are still showing profitability but simply run out of cash, can't pay their bills and are forced into insolvency.
The "salesman problem" is that a salesman thinks he's "made a sale" when he signs the contract. Often companies are daft enough to pay commission at that stage, irrespective of whether the contract is ever properly performed. Until you've actually been paid in hard cash a "sale" isn't worth a row of beans.
I think I am clear on the difference between profit and cash, and the need to get paid quicker to improve the latter. The question though is whether paying out dividends (negative cash, surely?) in excess of your earnings will impact your cash flow to an extent that getting paid a day or two earlier becomes fairly insignificant.
You are correct to suggest that "management" appears to be working hard to keep up appearances by maintaining the dividend.
The question becomes, what costs have they been charging to the P&L before the Earnings Per Share figure emerges? It's quite possible they think EPS is only temporarily suppressed due to, for instance, some bad debts written off in the year and which will not be repeated in the future.
The question becomes, what costs have they been charging to the P&L before the Earnings Per Share figure emerges? It's quite possible they think EPS is only temporarily suppressed due to, for instance, some bad debts written off in the year and which will not be repeated in the future.
You may be interested in an obvious, but slightly different view of dividends.
Shareholders collectively own a business, so when dividends are paid, the shareholders are simply receiving what they had already owned.
Some very profitable companies do not pay dividends by choice, because it is considered that money can earn more for shareholders, by being kept within the business. Berkshire Hathaway is one example.
Not an investment though, for investors who do need/want the regular income.
Jambo85 said:
I think I am clear on the difference between profit and cash, and the need to get paid quicker to improve the latter. The question though is whether paying out dividends (negative cash, surely?) in excess of your earnings will impact your cash flow to an extent that getting paid a day or two earlier becomes fairly insignificant.
Re: impact of dividend payments on cash....In basic terms it means the company is paying out more cash than it has coming in
In the short term it should be fine. Even though current earnings may be less than dividend payments the company may well have some cash saved up from previous years.
In the long term either the company will need to borrow more money (to keep paying out to investors) or it will run out of cash and go bankrupt.
Countdown said:
Jambo85 said:
I think I am clear on the difference between profit and cash, and the need to get paid quicker to improve the latter. The question though is whether paying out dividends (negative cash, surely?) in excess of your earnings will impact your cash flow to an extent that getting paid a day or two earlier becomes fairly insignificant.
Re: impact of dividend payments on cash....In basic terms it means the company is paying out more cash than it has coming in
In the short term it should be fine. Even though current earnings may be less than dividend payments the company may well have some cash saved up from previous years.
In the long term either the company will need to borrow more money (to keep paying out to investors) or it will run out of cash and go bankrupt.
Thanks again.
NRS said:
To be honest I think many of the HC producers have been doing this. With costs based on high oil price and with contracts signed for years ahead then the company gets a bit of a squeeze for a while on cash flow.
....
Now companies are turning things round on the cost side, as service companies will not get contracts without large price cuts.
That's the trouble - we're a service company. And the producers wasted no time re-negotiating existing contracts when the price fell!....
Now companies are turning things round on the cost side, as service companies will not get contracts without large price cuts.
Jambo85 said:
That's the trouble - we're a service company. And the producers wasted no time re-negotiating existing contracts when the price fell!
Service companies once survived at 50 dollar oil prices too. So they will and are adjusting. And will and should renegotiate their own supplier and service provider contracts.The oil industry and ancillary companies got fat. Downstream has always been relatively lean. I'm pleased to see Upstream/Producers adopting some of the same lessons/cost stewardship/ingenuity.
Jambo85 said:
That's the trouble - we're a service company. And the producers wasted no time re-negotiating existing contracts when the price fell!
Presumably, at this stage of the cycle, the producers are in the stronger position regarding negotiations, even though some of the service companies they deal with, are very big businesses. During booms, I suppose service company capacity is stretched, so they then become stronger in negotiations. An interesting practical example of cyclical investment sectors.
From an investors perspective, I only pay attention to overall performance, but I do now see that Shell and BP shares in 2017, are at present +1.3% and -3.3% respectively. That does not include dividends, which of course are significant for these companies.
Not easy times for the oil and gas producers, but has been looking better recently. Lately, the oil price increase though has been offset by a stronger Pound vs US Dollar, therefore slightly going against the dollar earners, for UK investors.
Thank heavens unlike wifeyT you don't work for
A
Management and
Engineering
Company
2015 addition
(F...ing
W...ankers)
or anyone that Wood think of buying it. Shez in a none O&G division and loosing car allowances from January as "car allowances are innapropriate for personal who us Bxbcock helicopters to their place of work". Yep, fine agree with that for the four on off for the Tam O'Shanters on the rigs, but those that work 500 miles South / 200 miles North that pump electrons into elastictrickery pipes have to drive between sites and you.........
A
Management and
Engineering
Company
2015 addition
(F...ing
W...ankers)
or anyone that Wood think of buying it. Shez in a none O&G division and loosing car allowances from January as "car allowances are innapropriate for personal who us Bxbcock helicopters to their place of work". Yep, fine agree with that for the four on off for the Tam O'Shanters on the rigs, but those that work 500 miles South / 200 miles North that pump electrons into elastictrickery pipes have to drive between sites and you.........
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