What Are 4 Reasons a Company Might Suspend Its Dividend?
Dividend-bearing stocks are popular among a wide variety of investors, so when a company decides to suspend its dividend payments, it can be a signal to sell for many shareholders.
Of course, those who own a stock primarily for the benefit of annual dividend payments are most likely to abandon ship. However, even investors who employ a buy-and-hold strategy may turn tail and run if a company that traditionally pays consistent dividends unexpectedly declares a suspension.
While a company suspending its dividends can be a sign of a struggling enterprise, not all dividend suspensions foreshadow corporate failure.
Key Takeaways
- Many companies pay dividends as a way to return profits to investors.
- Some companies, however, choose to retain earnings in order to fund new growth opportunities.
- Companies may also suspend regular dividends in response to financial troubles or unforeseen large expenses.
Understanding 4 Reasons a Company Might Suspend Its Dividend
Reason 1: Financial Trouble
The chief cause of a dividend suspension is the issuing company is under financial strain. Because dividends are issued to shareholders out of a company's retained earnings, a struggling company may choose to suspend dividend payments to safeguard its financial reserves for future expenses.
If revenue is down or costs are up, the amount of money left over for dividends at the end of the year may be minimal or nonexistent. Sometimes, dividend suspensions may be announced out of necessity, meaning there is no profit to distribute, or out of proactive financial planning, meaning profit margins are not large enough to warrant any nonessential spending.
Reason 2: Unexpected Expenses
Another reason a company may suspend its dividends is due to unexpected one-time expenses that temporarily reduce profits. Even if revenues remain constant year to year, a lawsuit judgment against the company or the need to replace or update costly equipment may require the company to use its earnings for other purposes.
In these scenarios, dividends are generally reinstated as soon as the unexpected expense is satisfied. Shareholders that jump ship at the first sign of trouble may be sacrificing future dividends and capital gains because they failed to research the cause behind the suspension. Not all dividend suspensions are cause for shareholder panic.
Reason 3: Funding Growth
Dividends are issued out of a company's retained earnings, which represents the total amount of profit accumulated over time that has not been previously distributed as dividends in prior years or otherwise used up.
Outside of dividend payments, one of the primary uses for retained earnings is to fund growth projects that, while temporarily costly, promise to provide increased income in the future. If a company decides the time is right to open a new location, expand its product line, or reach out to a new market segment, it may dip into its retained earnings to fund the growth. In this case, dividends may be suspended temporarily to facilitate increased earnings.
Again, shareholders who dump a stock that suspends dividends to fund growth may be missing out on accelerated capital gains and increased dividends in future years.
Reason 4: To Defer Preferred Dividends
Dividend distributions can be a little complicated because there are two types of stock that a company can issue. Most stock is considered common stock, and dividends are issued at the discretion of the issuing entity.
However, many companies also issue preferred shares that do not carry the same ownership rights as common stock but do provide a guaranteed dividend amount each year, which is typically higher than the dividend received by common shareholders.
To issue dividends to common shareholders, the company must first pay back any dividends due to preferred shareholders. In some cases, a company may have the funds necessary to pay a common dividend but not to pay both preferred and common dividends. In this case, a company may choose to pay preferred dividends but suspend common dividends or decide to suspend all dividends entirely.
However, any preferred dividends that are deferred must be paid before any common dividends can be distributed. In this case, common dividends may be suspended indefinitely so the company can afford to pay preferred shareholders. Companies that have to suspend preferred dividends fight an uphill battle against ever-increasing overdue payments in subsequent years, so this is not a popular choice unless the company is in serious trouble.
FAQs
Suspended Dividends are dividends that a company has temporarily halted. This can be done for various reasons, but it usually occurs when a company faces financial difficulties. The decision to suspend dividends is often made to save money and preserve cash reserves.
Why would a company suspend dividends? ›
Suspended Dividends are dividends that a company has temporarily halted. This can be done for various reasons, but it usually occurs when a company faces financial difficulties. The decision to suspend dividends is often made to save money and preserve cash reserves.
Why would a company cut its dividend? ›
Companies usually make drastic dividend cuts because of financial challenges like declining earnings or mounting debts. Sometimes companies may cut dividend payments for more positive reasons, like preparing for a major acquisition or a stock buyback.
What are the 4 dividend policies? ›
There are four major types of dividend policies: regular dividend, irregular dividend, stable dividend, and no dividend. Dividend policies dictate how a company decides to distribute its earnings to its shareholders.
What are some reasons that a corporation might not pay dividends? ›
Firms pay no dividends due to cash constraints and investment opportunities. Firms do not pay dividends because of poor profitability and earnings. Firms avoid paying dividends due to the cost of raising external funds.
What causes a stock to be suspended? ›
An exchange, broker, or the SEC can implement a stock halt. Trading halts can stem from multiple causes. Volatility and pending news are two of the most common reasons. Other causes include failure to document filings with the SEC, suspected fraud or market manipulation, and lack of funds to pay the clearinghouse.
Why do companies suspend trading? ›
What is a Stock Halt? A stock halt, often referred to as a trading halt, is a temporary halt in the trading of a security. Usually, the halt is imposed for regulatory reasons, the anticipation of significant news, or to correct a situation in which there are excess of buy or sell orders for a specific security.
What companies suspended dividends? ›
Here is the list of companies with a market cap above $10 billion that have suspended their dividends since the beginning of the COVID-19 pandemic and that as of August 2021 have not yet reinstated them: Aptiv, Boeing, Carnival, Delta, Disney, Expedia, Ford, General Motors, Hilton, Las Vegas Sands, Marriott, and ...
What causes dividends to decrease? ›
"More seriously, companies that cut their dividends could be signaling trouble." They might be anticipating weak sales, or less profit due to higher operating costs, or management turnover -- any of which could cause a significant stock drop.
Can a company stop paying dividends? ›
While a company may choose to regularly issue dividend payments for decades on end, the board of directors can also choose to reduce those payments or even entirely discontinue the practice at any time. Unlike the interest on a bond, a company is not required to make dividend payments to its shareholders.
There are various factors affecting the dividend decisions of firms carefully assessed. Profitability, cash flow, financial health, growth options, industry norms, legal and regulatory needs, and shareholder preferences all play an important role in shaping dividend policies.
What are the 4 dividend options? ›
A company can share a portion of its profits with four different types of dividends. Your monthly brokerage statement might show a CASH dividend, a STOCK dividend, a HYBRID dividend or a PROPERTY dividend.
What causes a company to not receive dividends? ›
Reasons for Non-Receipt of Dividend
A small error in the account number or IFSC code can lead to non-receipt of dividends. Processing Delays: Sometimes, there might be delays in the processing of dividends. It could be due to administrative issues or technical glitches.
Why a company can justify not paying dividends? ›
12 The argument against dividends is based on the belief that a company which reinvests funds (rather than paying them out as dividends) will increase the value of the company in the long-term and, as a result, increase the market value of the stock.
Which of the following are reasons that companies should not pay dividends? ›
There are many reasons:
- Reinvestment Focus. A company with a focus on reinvesting all of its earnings will naturally skip the dividend-payment process. ...
- Debt Restrictions. ...
- Financial Issues. ...
- For Acquisitions. ...
- To Meet Unexpected Costs.
Breach of duty and unfair prejudice claims
However, if the decision not to pay is taken in breach of duty, for an improper reason, then a shareholder might have recourse by bringing a claim that the failure to declare dividends is unfairly prejudicial to the shareholders.
What happens when a company suspends its shares? ›
The suspension of the shares will have an influence on its value, however, it does not exactly mean that the value of the stock will turn zero. It only results in a ban on trading in an exchange. Suspension on the shares can be revoked if the company manages to comply with all the regulations of the exchanges.
Can a corporation withhold dividends? ›
If the receiving corporation owns less than 20% of the distributing corporation's stock, it can deduct 50% of the dividends received. If the ownership is 20% or more, but less than 80%, the deduction increases to 65%.
When can dividend be revoked? ›
Where a dividend has been declared illegally or violating the requirements of the law, the board of directors would be justified in revoking the dividend. Since provisions of Final Dividend are also applicable to Interim Dividend. Once declared interim dividend cannot be revoked except with the consent of shareholders.
