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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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By evankoh posted on 15 Feb 2016 - 2,743 views

In the previous article, I looked at how

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.

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.

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

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,

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

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,

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.

Like

0 likes

0 comments

Next Article > < Previous Article

Dividend Strength Estimator Growing Dividends - Does Debt-to-equity ...

List All Articles

Introducing Technical Charts to SGXcafe

I have been interested in learning and integrating various approaches, namely fundamental analysis, technical analysis, portfolio management and machine learning to help myself make better investments/trades. This is the one of the reasons why SGXcafe exists. Recently, I started learning more about technical analysis through a book titled, Come into my Trading Room. I am thankful to Azrael for introducing ...

SGXcafe's Own Forum!

Several users have independently suggested that SGXcafe should have its own forum. Hence, I spent the last week building it and I am excited to share that the forum is live and ready for use! For a forum to be successful, it requires the active participation of the community. Currently, SGXcafe has several tens of thousand visitors every month, of which several thousands are heavy users of SGXcafe. ...

How My Wife Uses SGXcafe - Dividend Strength

Recently, I finally managed to convince my wife to start investing directly using her own account. That is, she now has to decide for herself what and when to buy/sell. I did this partly so that she can directly feedback to me about what features needs to be improved or added to SGXcafe for users like her. I'll let her tell you about her experience using SGXcafe. --- Unlike Evan, I have no interest ...

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