If you own shares in a publicly traded company, the chances are good that you are familiar with dividend payment. When a public company generates cash through their business operations, they typically allocate a portion of this revenue to their shareholders via dividend payments. When dividends are paid to shareholders, this cash transfer is often reported as an outflow on the company's cash flow statement. Using a simple formula, you can determine what proportion of outward cash flow is devoted to dividend payments.
A cash flow statement allows individuals to better asses the extent to which dividends are being paid to shareholders and what percentage of outward cash flow is represented by these dividends.
Understanding The Fundamentals
It is important to remember that not all outbound cash flow is devoted to dividend payments. In fact, the dividends appearing as part of the outward cash flow typically represent payments made to holders of common stock, or stock that offers dividends on a discretionary basis to shareholders. Unlike preferred stocks, which offer consistent dividend payments, it is quite possible that dividends may not be paid at all to holders of common stock. However, given the fact that common stock shareholders have ownership of the company proportional to the number of shares they hold, these individuals are also able to influence the direction and decisions of the company's board of directors to a certain extent.
Likewise, interest paid on loans and bonds will also appear as cash outflow, making it that much more important for investors to understand how to properly read and assess the information available on cash flow statements.
Calculating Cash Flow and Dividends
In order to determine the proportion of outflow devoted to common stock dividend payments, you will first need to know the current dividend payments and the number of shares to which dividends are being paid. So, if there is a $2 quarterly dividend on 2,000,000 outstanding shares, we would know that there is $4,000,000 outflow in dividend payments per quarter. This information can be particularly helpful when you are weighing the risks and benefits of purchasing shares in a company.
If, for example, a company is reaping significant stock market gains but devotes little outflow to common stockholders, it may not be worth your time to invest. However, if you notice significant cash outflow to stockholders in lean economic times, this may appear to be a seemingly unstable decision that would also cause you to think twice before investing. With this information in mind, it is easy to understand why a cash flow statement can act as an excellent prognosticator of a company's current values and future success. With that in mind, it strongly recommend that you take the time to review cash flow statements regularly as part of your evaluative research into companies who you may be interested in investing in.
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