It is not every time a company fails to pay dividends that you should panic or sell your investments. Here are some key reasons why some companies will not pay dividends.
One of the most alluring reasons for investing is being able to get dividends from the company you have invested in. As such, dividend stocks are probably the most purchased stocks in the stock market and a plethora of companies pay dividends as a way of encouraging their investors and to return profits to them.
There are, however, situations where certain companies do not pay dividends. There are some that previously paid but stopped, and there are others that cut down on how much dividends they pay out. Knowing that dividend-bearing stocks are very important to many investors, why will a company suspend or stop giving out dividends even if it means their stocks get sold by so doing? There are many reasons:
Reinvestment Focus
A company with a focus on reinvesting all of its earnings will naturally skip the dividend-payment process. These are the companies that choose to retain earnings in order to be able to finance new growth opportunities and expand its operations.
As such, it will attract investors who are also focused on investment growth and value creation. This is one of the most common reasons certain businesses do not pay dividends.
Debt Restrictions
There are also situations where companies want to pay dividends but are unable to as a result of debt restrictions. Where a company is caught up in an unpaid bank loan or lines of credit, it could be restricted from paying dividends to its shareholders.
Financial Issues
You cannot give what you do not have. Some companies simply cannot pay dividends because they do not have the required amount of cash flow or even profit to share dividends from.
This is the core reason a company that was paying dividends before might consider suspending it. The company might be too preoccupied with trying to keep its financial reserves safe for future expenses. As such, it could be a necessity tied to the survival or otherwise of the company.
For Acquisitions
Also in line with a desire for growth and expansion, a company might simply just be hoarding its cash towards being able to meet up with an acquisition. An acquisition involves the purchase of another towards attaining synergy. The idea is to be able to expand towards ultimately producing even more value for investors.
To Meet Unexpected Costs
A company might have planned to give out dividends only to have one of its product lines shut down because of an equipment failure. This unexpected expense is also a reason why a company may suspend its payment of dividends until the need has been taken care of.
From the foregoing, it is clear that it is not every time a company fails to pay dividends that you should panic or sell your investments. The goal of the company is to make money for its owners/ investors/ shareholders, so you can rest assured that more often than not, their decisions are taken with your gains as a core focus.
Written by Lawretta Egba.
