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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 - 5,493 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 ...

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Previously, I mostly viewed "What stocks to buy" as a ranking problem. What this means is that I would rank all the stocks available based on some criteria and pick the top few to purchase. Hence, tools that I built tend to generate a score and ranked accordingly. Examples are iAssist, Dividend Strength and Scorer (Scorer was previously known as Screener). However, after taking the eVIMC course and ...

Improved Dividend Strength Estimator

In a previous article, I introduced a model which uses fundamental data to estimate Dividend Strength, P("same or more dividends next year" | "predicted to be giving same or more dividends next year"). Numerous people have shown interest in this estimation model, therefore I decided to spend more time improving its performance. Its performance have increased from AUC (Area Under ROC) of 0.65 to 0.7. ...

Quick Updates: Dividend Withholding Tax and More

Merry Christmas! I hope you are enjoying yourself this holiday season. Just wanted to quickly share some changes I have made over this weekend: Dividend Withholding Tax As StocksCafe recently started supporting US stocks, some users have requested for StocksCafe to automatically adjust for dividends based on individuals' tax status. For example, most Singapore residents would incur a 30% tax on all ...

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