How do companies post losses and still pay dividends?

  

Date Posted: 7/26/2012 5:01:12 AM

Posted By: moff J  Membership Level: Silver  Total Points: 485

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Many of us could have noticed a number of companies which have reported losses in a given financial year and still manage to pay dividends. A company that has reported losses looks very unlikely to pay dividends in that year because as some of us would argue, the company may not be doing well in operations, and even from the legal perspective, a company is not under any obligation to pay dividends when it has posted losses. This article is going to explain exactly how such companies are able to pay dividends and the motive behind it.

Dividends are of different types; cash dividends, stock dividends, property dividends and liquidating dividends. Here, we will be talking about cash dividends because it is the one that may appear to contradict with posting of losses.

Before going any further, let us know what profits, losses, dividends, and cash are.
Profit is the return on investment that is posted when the company's revenue exceed the expenses. It increases the shareholder's claim to that company.
Losses are posted when expenses exceed revenues. They are a reduction to the net assets/ shareholder's worth in a company.

Dividends are the returns that investors/owners of a company get from their investment in a given company. It is a return on shareholder's money.
Cash is the money that is held by a company in liquid form, that is, it is readily available when required, for example, money saved in a bank.

One thing we have to make clear up to here is that profit does not necessarily mean cash inflow. This is because a company may have made sales on credit which is going to be recognized as revenue even before cash is received. Therefore, a business may report profits and yet have negative bank balances, or report losses and have positive cash balances. It

is because of this that companies pay dividends even when they have posted losses.
A company that has healthy cash balances will give a return to its investors regardless of the kind of results that it has posted. This is because dividends are paid from cash reserves and not from profits/losses.

The reason why businesses pay dividends even when it has posted losses is in order to maintain a regular dividend payout policy. This has the advantages of among other things enhancing a firm's share price on the stock exchange. It ensures that the firm's shares are not deteriorated by the poor results. It also aims at sustaining investor confidence in a company by promising constant returns.

In conclusion, a review of the article tells us that companies have devised numerous ways of protecting and promoting their corporate image and maintaining investor confidence in it. Payment of dividends even in times of poor results is just one of the ways. This goes ahead to tell the investors that the company's operations will continue in the foreseeable future and therefore there should be no cause for alarm. This helps protect and boost a company's share price in the stock exchange which many investors use as a gauge of how well the company is doing.

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