Will cutting dividend payment enhance company’s growth or sparks bankruptcy?

When you invest in a company, what do you expect? Gaining higher returns from the investment or sustaining that ownership in the company? Obviously, sustaining the ownership of the company with the objective of a business future benchmark, that way to gain continues return which increases your wealth and enables financial sustainability. However, some companies provide new dividend policies that does not make sense and making the company's lose its shareholders and experience insolvency, which are in strains to cut the dividend payment with the objective of increase the income of the company, well, obviously the shareholders will sell their shares from this bad news of gaining lower return from the guaranteed amount, hence negative abnormal returns. 

Current example may include General Electric share price in 2017 was $20.49 and share price in 2018 reduces to $9.42 because of new dividend policies with massive reduction of 50% dividend yield and if this continuously reducing the company will go to bankrupt. That’s the problem with companies nowadays, to apply cost control not fully focusing on reducing fixed and variable cost, but cutting returns from investors and shareholders, bravo. Basically, General Electric cannot provide the promise to the shareholders because from unproductive investment and competitive disadvantage because from a new insufficient management under a new CEO: talking about greedy and not following corporate governance to ensure shareholder wealth maximization which is highly important, because General Electric divest in many assets and now reducing dividend payment which also mean taking money away from shareholder.

In my experience on investing, usually I invest in blue-chip stocks focusing on public companies, and it does provide lower returns, however a successful benchmark is applied, I use 2 types of investment that earns are cash and stock dividends. Cash dividend is a normal payment of dividend gain to shareholders and stock dividends is by increase shares outstanding to specified shareholders which increase ownership. Mostly I prefer to use stock dividends instead of cash dividends, because based on blue-chip stock investment it will continuously increase of profits and providing continues dividend payment without experiencing financial problems such as cutting dividend which is an insufficient idea, and increasing ownership of company with the guarantee of asset ownership.

One quote that is based on true inspiration is by Warren Buffet: “You cant’s reach success in investment, if you do not think independently” signifying that proper and calm decision making will result in a profitable investment. From my point view this really true and relate to me in many ways, because the only reason why I invest in diversified securities with obviously low risk it is a smart investment to have successful benchmark, and many of people take risk and do not understand the true rating and value of securities resulting a huge loss.

So what does that quote relate with dividend policy or reducing dividend? It means that even though you might perform SMART investment, a company or fiduciary still has control on your money and may change strategies, such as imagine you invest in share with low risk but may provide a long-term profit, and the company decided to reduce its dividend payment, that would be frustrating for an investor to gain lower and lower returns, leading to obviously selling the share. It also signifies that something is wrong with the company as it has so much expenses and disbursement and decided to not reduce its fixed or variable cost, but to reduce investors returns.

S&P 500 tracks dividend yield is continuously decreasing because from cutting dividend payment, quoting the objective is to expand company’s growth and not because the company is in trouble. This claim is inaccurate and mindless, because personally in normal situation a business that’s in trouble should provide a strategy of increasing revenue and reducing expense to enhance retained earnings, instead of reducing dividends because it is forced to pay high expenses and debt caused by lower revenues, which signify as financial stress. It’s also signaling a weakness to competitors, as the signaling of insolvency may provide competitor opportunity to gain higher customers, to attract investors from the company that experience insolvency, thus the competitor gain higher strength of funding and asset growth, as well may acquire the insolvent company.

My claim is argumentative, because several cases in the past based on economic growth companies that decided to cut dividend payment to increase cash to pay back expenses, debts and establish new project which in the long term gaining high profits and able to pay dividends to shareholders. However, based on my argument focused on current situations since the international debt increases 225% signifying an economic bubble and rising inflation heighten the interest rates resulting to possible future recession that will create insolvency for companies, including companies cutting dividends with the objective of paying disbursement and losses and not having sufficient funds to enable growth to the company and paying the return promised to owners.

In summary, personally dividend and dividend policy are highly relevant to detect company’s future growth, shareholder wealth maximization and macroeconomic activities, because in my analysis companies give dividend policy with the objective of distributing dividend perfectly to shareholder and making them gaining return in cash or stocks thus shareholder wealth should increase. However, if companies cut dividends or providing dividend payable to shareholder signifies an insolvency for the company, some companies having losses and sell assets to gain cash to pay the dividend to the shareholders which is irrelevant for shareholder maximization even though the shareholder gain capital returns from divestment, and in their mind they will gain the capital and provide exit strategy from the company because the company will go bankrupt from that bad news.

Which signify all companies needs to be productive in their business operations to generate economies of scale, profitability’s, avoid risks and often provide a positive confidence level to investors and shareholders that the company is financially healthy. Never cut dividends, but provide opportunity of increase in dividends small portion to satisfy shareholders, and in the case of low net profits the business should provide cost reduction and cost control based on fixed and variable expenses internally and externally of the company.