Subscribe to RSS feed Growing Dividends - Does Debt-to-equity Ratio and Operating Cashflow Matter? (Part 2)

By evankoh posted on 15 Feb 2016  -  42,558 views


In the previous article, I looked at how Debt-to-equity and Operating Cashflow (referred to as DER and OC from hereon) would influence Dividend Per Share (DPS). In particular, I looked at see how change of DER and change of OC in year X influences the DPS in year X+1.

In this article, I would like to focus on the how absolute DER and absolute OC in year X could be a predictor of DPS in year X+1.

Methodology
For chi-square test, discrete data is required. In the previous article, I simply chose zero as the splitting point, which was reasonable since we were looking at change of DER, change of OC, and change of DPS. I can continue to use zero for change of DPS, but I would need to find a new, reasonable splitting point for absolute DER and absolute OC. To do that, I would simply iterate through all possible splitting points and choose the splitting point that returns the lowest p-value with one constraint, that is ensuring that each bin would have at least 10% of the original data after split.

Debt-to-equity Ratio's influence in numbers
P(positive DPS change) = 61.8% (or 899 / 1454)
P(positive DPS change | DER >= 79.3) = 57.3% (or 160 / 279)
P(positive DPS change | DER < 79.3) = 62.9% (or 739 / 1175)
p-Value = 0.086

Debt-to-equity Ratio's influence in English
When DER is higher than or equal to 79.3%, there is a 57.3% chance of having the same or higher dividends the following year, whereas with a DER lower than 79.3%, there is a 62.9% chance of having the same or higher dividends the following year.

Basically, the result is stating that having a lower debt-to-equity ratio increases the chance of having better dividends the following year, but with a p-value of 8.6% (i.e. 8.6% probability that this result is caused by random chance).

Operating Cashflow's influence in numbers
P(positive DPS change) = 62.7% (or 1027 / 1638)
P(positive DPS change | OC >= 152) = 77.6% (or 204 / 263)
P(positive DPS change | OC < 152) = 59.9% (or 823 / 1375)
p-Value = 5.27E-8

Operating Cashflow's influence in English
When the OC is larger than or equal to SGD 152 million, there is a 77.6% chance of having the same or higher dividends the following year, whereas with an OC smaller than SGD 152 million, there is a 59.9% chance of having same or higher dividends the following year.

Basically, the result is stating that having a larger OC significantly increases the chance of having better dividends the following year, and with a p-value of virtually 0, absolute OC is certainly an important value to look at if you are interested in dividends.

Conclusion
We can conclude a few things from the above results:

1) Absolute value of DER is not that influential in determining next year's dividends.

2) Comparing the absolute DER and change of DER (in the previous article), it seems to indicate that every company has a different sweet spot for DER, hence its change is more important than its absolute value, at least for forecasting dividends for the following year.

3) Not surprisingly, companies with a larger OC tend to give the same or higher dividends the following year. This is somewhat related to another article where I found that companies with a larger market capitalization tend to be more reliable in their dividends payout.


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