Sarah writes:

I saw in the New York Times [Tuesday] that IBM is raising its dividend by 10%, and was reminded of something I heard on your podcast recently, something I'm admittedly not sure I have right: when a company raises its stock dividend to (possibly unrealistically) high levels, it may be a sign that the company is in trouble.
Didn't Lehman Bros. do this shortly before its troubles came to light? Should a company really be passing an increased amount of revenue to its shareholders at such an unstable economic time? Is this increase likely to indicate that a company may be trying to inspire confidence while hiding its problems, or is it more likely that IBM is simply doing well and wants its shareholders to know it?

Vinny Catalano answers Sarah's question after the jump.

Here's what our favorite stock guru, Vinny Catalano, president of Blue Marble investment firm, had to say:

When a company raises its dividend, it is providing what it called a signaling device. It is signaling to the market that it cannot use that money for growth purposes. It cannot find great growth opportunities above and beyond what they are presently doing. They are making extra money and instead of plowing it back into the business, because the growth opportunities are just not there for the cash flows that they are generating, they are paying back in the form of the dividend. Usually when you see stock dividends being increased, it is an indication that the company's growth rate is slowing. It doesn't mean they are going into dire straits like Lehman, but it does mean that the company is at a slowing growth rate.

What does IBM says about the increased dividend? This is the 14th year in a row that the company has increased its dividend. Vice president Jesse Greene told Reuters:

"With the strengthening of our business, we're very comfortable continuing to return profits to our investors even in this difficult environment when others cannot," said Jesse Greene, IBM's vice president of financial management.

Greene said the company's focus remains investing in its business.

categories: Questions from You

2:45 - April 30, 2009

What is this?

Share