Earnings per share versus cash flow per share as predictor of dividends per share

Abstract

Purpose -The purpose of this paper is to compare the relative power of operating cash flow and earnings in the prediction of dividends. Design/methodology/approach -A linear mixed effects model is used in terms of selected model fit criteria. Findings -Based on the selected model fit criteria, cash flow per share is shown to produce a better fit than earnings per share, but it cannot be said how much better. Research limitations/implications -Quarterly CRSP and Compustat data from 2000 to 2006 for 1,902 dividend-paying firms are analyzed. Future work would need a different methodology to determine how much better cash flow is as a predictor of dividends. Practical implications -Both earnings per share and cash flow per share are found to be reasonable dividend predictors. Social implications -Additional insight is provided on modeling factors that contribute to a firm's decision to engage or disengage in a dividend payment policy. Originality/value -The study described in this paper continues work on predicting dividends per share. Results show cash flow per share is a better predictor than earnings per share. Investors and analysts predict dividends as part of their stock valuation work. This study suggests focusing attention on using cash flow per share as the predictor of dividends.

Corporate governance and dividend pay-out policy in UK listed SMEs

“…As hypothesised and consistent with previous studies (Baker, 2009;Consler & Lepak, 2011;Denninger, 2012;Jiraporn et al, 2011;Osman & Mohamed, 2010;Rafique, 2012;Thanatawee, 2013), we find statistically significant and positive association among firm size, leverage, cash flow per share and dividend pay-out rate. However, we find a positive, but insignificant, association between ROA and DP1, which is not in line with our expectations.…”

Auditing the Statement of Cash Flows for Jordanian Public Listed Companies

“…Possible reasons for this include limited awareness of auditors as to the importance and relevance of the statement of cash flows, and that auditors do find other information more significant to their audit than cash flows, hence they allocate limited time and efforts to the statement of cash flows. These findings contradict to some extent with many of the other international studies discussed earlier, such as Hung et al (1995), Kusuma (1999), Farshadfar et al (2008), Consler et al (2011), andMiranda-Lopez andNichols (2012). This contradiction also relatively applies to earlier Jordanian-based studies, such as Al-Khadash and Al-Abbadi (2005) and Matar and Obaidat (2007).…”

“…They also found that this superiority of cash flows from operations over earnings applies for all sizes of companies, and increases with the increase of company size. In addition, Consler, Lepak and Havranek (2011) found that cash flow per share is superior to earnings per share in predicting dividends. Finally, Miranda-Lopez and Nichols (2012) found that non-professional investors in Mexico use cash flows more than earnings, and that valuation by using cash flows, compared to using earnings, has a lower chance of producing forecasting errors.…”

The Research about Effects of Borrowing on the Firm's Profitability

“…In physics, leverage refers to the increase in power that comes from using a lever. In finance, leverage, or gearing, refers to the increase in profitability, usually measured with EPS [1][2][3][4] that can come from using debt financing.1 to see why and how borrowing affects EPS; we examine the Jolly Bear Company (JBC). JBC is currently all-equity financed with 2 million shares outstanding worth $100 each.…”