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
Companies suspend dividends for different reasons. Sometimes it is a cash flow issue, which is a legitimate cause for concern for investors. Other times, the company wishes to redirect this money into a growth opportunity, such as acquiring a competitor or expanding into a new market.
Why would a company suspend dividends? ›
Companies suspend dividends for different reasons. Sometimes it is a cash flow issue, which is a legitimate cause for concern for investors. Other times, the company wishes to redirect this money into a growth opportunity, such as acquiring a competitor or expanding into a new market.
What are the 4 dividend policies? ›
First is a regular dividend policy, the second is an irregular dividend policy, the third is a stable dividend policy, and lastly no dividend policy. The stable dividend policy is further divided into per share constant dividend, pay-out ratio constant, stable dividend plus extra dividend.
Why does a company stop paying dividends? ›
Unlike the interest on a bond, a company is not required to make dividend payments to its shareholders. Companies can, and often will, do this to preserve cash when profits are down or in the face of market uncertainty.
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 does "dividend suspended" mean? ›
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 do companies suspend shares? ›
Suspended trading occurs for many different reasons, including: A lack of current, accurate, or adequate information about a company, such as when it's not current in its filing of periodic reports. Questions about the accuracy of publicly available information, including the contents of recent press releases.
What is the rule 3 of dividend rules? ›
Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.
What are the six factors that affect a firm's dividend policy? ›
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 factors that affect the dividend policy of a company? ›
A company needs to consider various factors before deciding on its dividend policy. These factors include its profitability, investment opportunities, financial position, industry norms, and economic conditions.
The HEI Board determined that suspending the quarterly cash dividend would allow us to continue to allocate cash to rebuilding and restoring efforts and best position us to serve our customers and communities.
Which company does not pay dividends? ›
List of All S&P 500 Companies with No Dividend
| Ticker | Company | 5-Year Sales Growth |
|---|
| AMZN | Amazon.Com Inc. | 182.85% |
| AN | Autonation Inc. | 56.22% |
| AZO | Autozone | 31.74% |
| BIIB | Biogen Inc. | 126.77% |
67 more rowsKey Takeaways. U.S. corporations are allowed to exclude a portion of the dividends they receive from other corporations in order to avoid double taxation. The federal dividends-received deduction applies only to corporations and not to individuals who receive dividend income.
Why does Amazon not pay dividends? ›
This is because Amazon's current strategy of not paying dividends could also have several advantages. If the company's stock grows in value over time due to the company's consistent investments in innovation and growth, investors could get back more than what they paid for if or when they choose to sell their stock.
Why doesn't Disney pay a dividend? ›
Disney put its dividend payments on hold in 2020 as COVID-19 led to lower theme park sales and new streaming service launches proved costly. In 2023, the company announced it was reinstating its semi-annual dividend, with its first payment going to shareholders in January of this year.
When can dividend be revoked? ›
Once a dividend declared by a company , cannot be revoked except with the consent of Shareholders. Since a declared dividend become a " Debt" in favour of shareholders declaring the same. It means that a declared dividend become a debt in favour of shareholders of the Company.
Can a company take back a dividend? ›
Once declared dividends have been paid, they cannot then be cancelled even if they are found to be unlawful.
Can you sue a company for not paying dividends? ›
Shareholder oppression lawsuit - Minority shareholders may sue for oppression if the majority shareholders improperly deny payment of reasonable dividends. Breach of fiduciary duty claim - A claim could arise if the directors breach their fiduciary duties surrounding dividend declarations.
