{"id":15817,"date":"2021-05-29T08:30:50","date_gmt":"2021-05-29T08:30:50","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=15817"},"modified":"2024-04-10T06:58:54","modified_gmt":"2024-04-10T06:58:54","slug":"sustainability-of-cash-dividends","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sustainability-of-cash-dividends\/","title":{"rendered":"Sustainability of Cash Dividends"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/hn2pw6Mx4OQ\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>The following are characteristics of companies that may not be able to sustain their cash dividends:<\/p>\r\n<ol>\r\n\t<li>Small, young companies: Small companies cannot sustain their cash dividend because earnings are ploughed back into the business.<\/li>\r\n\t<li>They are in an industry that is highly volatile, e.g., technology and pharmaceutical: They uses a lot of cash to respond to future developments in their industry.<\/li>\r\n\t<li>They spend more money on research and development; thus, they do not have free cash to distribute dividends.<\/li>\r\n\t<li>They have many profitable investment opportunities and will opt to use cash than debt or issuing new equity to finance the positive NPV projects because internally generated funds are cheaper.<\/li>\r\n\t<li>They have a relatively lower return on assets.<\/li>\r\n\t<li>They have relatively high debt ratios.<\/li>\r\n\t<li>They are under financial and operating distress.<\/li>\r\n<\/ol>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which of the following is the <em>most likely<\/em> reason for a company&#8217;s inability to sustain cash dividends?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>Low research and development expenditure.<\/li>\r\n\t<li>Financial and operating distress.<\/li>\r\n\t<li>High return on assets.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p>Companies under financial and operating distress do not have enough earnings to pay out cash dividends regularly.<\/p>\r\n<p><strong>A is incorrect. <\/strong>Companies that do not spend much on research and development have more cash to distribute to shareholders; thus, they will regularly pay cash dividends.<\/p>\r\n<p><strong>C is incorrect. <\/strong>This is a characteristic of a company that pays cash dividends regularly.<\/p>\r\n<\/blockquote>\r\n<p>Reading 18: Analysis of Dividends and Share Repurchases<\/p>\r\n<p><em>LOS 18 (n) Identify characteristics of companies that may not be able to sustain their cash dividend.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>The following are characteristics of companies that may not be able to sustain their cash dividends: Small, young companies: Small companies cannot sustain their cash dividend because earnings are ploughed back into the business. They are in an industry that&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,346],"tags":[216,344,368,382],"class_list":["post-15817","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-corporate-finance-cfa-level-2","tag-cfa-level-2","tag-corporate-finance","tag-reading-21analysis-of-dividends-and-share-repurchases","tag-sustainability-of-cash-dividends","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Sustainability of Cash Dividends - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Discover the characteristics of companies such as financial distress, high debt ratios, and limited profitable investment opportunities.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/sustainability-of-cash-dividends\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Sustainability of Cash Dividends - 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