We can draw several interesting conclusions from this study. First, the vast

We can draw several interesting conclusions from this study. First, the vast number of firms announcing dividend cuts did so in response to earnings declines (384) rather than in conjunction with investment or growth opportunities (16). The market

10 Woolridge, J.R. and C. Ghosh, 1986, Dividend Cuts: Do they always signal bad news?, The Revolution in Corporate Finance, Blackwell.

seems to react negatively to all of them, however, suggesting that it does not attach much credibility to the firm's statements. The negative reaction to the dividend cut seems to persist in the case of the firms with the earnings declines, while it is reversed in the case of the firms with earnings increases or better investment opportunities.

Woolridge and Ghosh also found that firms that announced stock dividends or stock repurchases in conjunction with the dividend cuts fared much better than firms that did not. Finally, they noted the tendency across the entire sample for prices to correct themselves, at least partially, in the year following the dividend cut. This would suggest that markets tend to overreact to the initial dividend cut, and the price recovery can be attributed to the subsequent correction.

In an interesting case study, Soter, Brigham and Evanson looked at Florida Power & Light's dividend cut in 199411. FPL was the first healthy utility in the United States to cut dividends by a significant amount (32%). At the same time as it cut dividends, FPL announced that it was buying back 10 million shares over the next 3 years, and emphasized that dividends would be linked more directly to earnings. On the day of the announcement, the stock price dropped 14%, but recovered this amount in the month after the announcement, and earned a return of 23.8% in the year after, significantly more than the S&P 500 over the period (11.2%) and other utilities (14.2%).

Retirement Planning For The Golden Years

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

Get My Free Ebook

Post a comment