How are you managing your portfolio now? SGXcafe will do it for you intelligently.

Sign up for free now!

Subscribe to RSS feed

I believe there are many investors like me who love to invest in companies that pay dividends. Naturally, we hope that companies we invest in would have growing dividends. So, the question is**"How can we differentiate companies that will have growing dividends from others?"**

In an attempt to find an answer to this question, I will perform a series of analyses in this and upcoming articles.

Today, I will focus on two metrics that are commonly thought to be useful in forecasting if a company is capable of distributing the same or higher dividends in future. They are**Debt-to-equity Ratio** and
**Operating Cashflow** (referred to as DER and OC from hereon). In particular, I would like to see how DER and OC in year X influences the dividend per share (DPS) in year X+1.

**Debt-to-equity Ratio's influence in numbers**

Based on the data I have collected from the internet about companies listed in the Singapore stock exchange, P(positive DPS change) is 64.1%. That is, out of 1054 companies that are paying dividends in year X, and with DER information, 676 are paying dividends the same or higher in year X+1. This is the baseline. That is, without using companies' fundamental data, if we randomly pick, we have a 64.1% chance of picking a growing dividends company. The goal is to increase this probability.

Let's see if DER can help.

P(positive DPS change | increased DER) is 61.2%. That is, out of 503 companies that are paying dividends and has increased DER in year X, 308 are paying the same or higher dividends in year X+1.

P(positive DPS change | reduced DER) is 66.8%. That is, out of 551 companies that are paying dividends and has reduced DER in year X, 368 are paying the same or higher dividends in year X+1.

For those who are a fan of p-value statistics, the chi-square test p-value is 0.0603.

**Debt to Equity Ratio's influence in English**

Basically, it means that a company with a reduced DER this year will have a better chance of paying the same or higher dividends next year compared to a company with increased DER (66.8% vs 61.2%). However, this statement has a 6% chance of being false.

Next, let's look at OC.

**Operating Cashflow's influence in numbers**

P(positive DPS change) is 64.7%. That is, out of 1223 companies that are paying dividends in year X and has OC information, 791 are paying dividends the same or higher in year X+1. You might be wondering why the baseline is slightly different from DER. This is because I do not have the OC and/or DER figures for all companies.

P(positive DPS change | increased OC) is 68.9%. That is, out of 531 companies that are paying dividends, and increased OC in year X, 366 are paying the same or higher dividends in year X+1.

P(positive DPS change | reduced OC) is 61.4%. That is, out of 692 companies that are paying dividends, and reduced OC in year X, 425 are paying the same or higher dividends in year X+1.

The p-value of chi-square test statistics is 0.0065.

**Operating Cashflow's influence in English**

Basically, it means that a company with an increased OC this year will have a better chance of paying the same or higher dividends next year compared to a company with reduced OC (68.9% vs 61.4%). The chance of the previous statement being false is low (0.65%).

**Conclusion**

Essentially, the results suggest that OC change is a better metric than DER change in forecasting next year's dividends. In fact, with a p-value of 0.06 for DER change, we would normally conclude that "DER change is not useful in forecasting dividends for next year".

It would be interesting to look at how the combination of them would perform though.

**More**

Some readers might be wondering why I am using change instead of absolute value, especially for DER since it is a ratio and hence comparable across all companies. Well, actually I did, and I will be sharing the results in the next article because I did not want to crowd this article.

Like

0 likes

0 comments

Next Article > < Previous Article

Growing Dividends - Does Debt-to-equity ... The John Neff Screener

List All Articles**Other articles by evankoh**

Facebook for Investor

Note: This feature have since been removed due to low usage. We all have a limited amount of time. Are you spending that time wisely? And are you spending more time than you should be scrolling through Facebook? I am :( In an attempt to change that, I thought that if I'm going to scroll through something on my phone, I might as well be scrolling through information on companies that I have invested ...

SGXcafe Will Continue To Stay Free

Long Story Short SGXcafe will continue to be free, but to cover for the high operating costs due to licensing, I would like to invite you to do one or more of the following if you would like to show your support for SGXcafe. 1) Help increase awareness of SGXcafe. You can do this via your blog, share SGXcafe's articles on facebook, or simply via word of mouth to people whom you believe can benefit from ...

Decide When to Buy or Sell Using Short Selling Activities

Note: This feature is not available anymore due to licensing issues. Here is a question: How do you decide when to buy or sell a stock? I started trading in SGX a year ago, and every time I have money to invest, I always wonder "Should I buy now? But if not now, then when?" Since I didn't have a good answer to that question, what I've been doing till now is simply buy the best stock that fits my portfolio ...

By evankoh posted on 10 Feb 2016 - 2,257 views

I believe there are many investors like me who love to invest in companies that pay dividends. Naturally, we hope that companies we invest in would have growing dividends. So, the question is

In an attempt to find an answer to this question, I will perform a series of analyses in this and upcoming articles.

Today, I will focus on two metrics that are commonly thought to be useful in forecasting if a company is capable of distributing the same or higher dividends in future. They are

Based on the data I have collected from the internet about companies listed in the Singapore stock exchange, P(positive DPS change) is 64.1%. That is, out of 1054 companies that are paying dividends in year X, and with DER information, 676 are paying dividends the same or higher in year X+1. This is the baseline. That is, without using companies' fundamental data, if we randomly pick, we have a 64.1% chance of picking a growing dividends company. The goal is to increase this probability.

Let's see if DER can help.

P(positive DPS change | increased DER) is 61.2%. That is, out of 503 companies that are paying dividends and has increased DER in year X, 308 are paying the same or higher dividends in year X+1.

P(positive DPS change | reduced DER) is 66.8%. That is, out of 551 companies that are paying dividends and has reduced DER in year X, 368 are paying the same or higher dividends in year X+1.

For those who are a fan of p-value statistics, the chi-square test p-value is 0.0603.

Basically, it means that a company with a reduced DER this year will have a better chance of paying the same or higher dividends next year compared to a company with increased DER (66.8% vs 61.2%). However, this statement has a 6% chance of being false.

Next, let's look at OC.

P(positive DPS change) is 64.7%. That is, out of 1223 companies that are paying dividends in year X and has OC information, 791 are paying dividends the same or higher in year X+1. You might be wondering why the baseline is slightly different from DER. This is because I do not have the OC and/or DER figures for all companies.

P(positive DPS change | increased OC) is 68.9%. That is, out of 531 companies that are paying dividends, and increased OC in year X, 366 are paying the same or higher dividends in year X+1.

P(positive DPS change | reduced OC) is 61.4%. That is, out of 692 companies that are paying dividends, and reduced OC in year X, 425 are paying the same or higher dividends in year X+1.

The p-value of chi-square test statistics is 0.0065.

Basically, it means that a company with an increased OC this year will have a better chance of paying the same or higher dividends next year compared to a company with reduced OC (68.9% vs 61.4%). The chance of the previous statement being false is low (0.65%).

Essentially, the results suggest that OC change is a better metric than DER change in forecasting next year's dividends. In fact, with a p-value of 0.06 for DER change, we would normally conclude that "DER change is not useful in forecasting dividends for next year".

It would be interesting to look at how the combination of them would perform though.

Some readers might be wondering why I am using change instead of absolute value, especially for DER since it is a ratio and hence comparable across all companies. Well, actually I did, and I will be sharing the results in the next article because I did not want to crowd this article.

Like

0 likes

0 comments

Next Article > < Previous Article

Growing Dividends - Does Debt-to-equity ... The John Neff Screener

List All Articles

Facebook for Investor

Note: This feature have since been removed due to low usage. We all have a limited amount of time. Are you spending that time wisely? And are you spending more time than you should be scrolling through Facebook? I am :( In an attempt to change that, I thought that if I'm going to scroll through something on my phone, I might as well be scrolling through information on companies that I have invested ...

SGXcafe Will Continue To Stay Free

Long Story Short SGXcafe will continue to be free, but to cover for the high operating costs due to licensing, I would like to invite you to do one or more of the following if you would like to show your support for SGXcafe. 1) Help increase awareness of SGXcafe. You can do this via your blog, share SGXcafe's articles on facebook, or simply via word of mouth to people whom you believe can benefit from ...

Decide When to Buy or Sell Using Short Selling Activities

Note: This feature is not available anymore due to licensing issues. Here is a question: How do you decide when to buy or sell a stock? I started trading in SGX a year ago, and every time I have money to invest, I always wonder "Should I buy now? But if not now, then when?" Since I didn't have a good answer to that question, what I've been doing till now is simply buy the best stock that fits my portfolio ...

A Taste Of Singaporean Healthcare And How Much It Cost

*Posted 2 hours ago* - gnefiur

Blog Post

Being A Co-Owner of GLP

*Posted 13 hours ago* - chinwai

Blog Post mc0

Can your job be replaced ?

*Posted 14 hours ago* - christopher

Blog Post

Dividend Income Updates - Q4 FY2016

*Posted 16 hours ago* - bhalimking

Blog Post

Will Insurance Deny a Claim If Death Is Due to Suicide?

*Posted 17 hours ago* - derek

Blog Post

See More Cafe Posts

Blog Post

Being A Co-Owner of GLP

Blog Post mc0

Can your job be replaced ?

Blog Post

Dividend Income Updates - Q4 FY2016

Blog Post

Will Insurance Deny a Claim If Death Is Due to Suicide?

Blog Post