Guide to Analysing Companies

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lysts as growth companies, plough most of their earnings
back into the business because they are growing fast and so
pay few, if any, dividends. Others, known as value companies,
usually have more mature businesses and therefore generate
more cash which can be distributed as dividends to share-
holders. Each type of share appeals to different types of in-
vestor. Most companies find that cutting their dividend from
one year to the next carries considerable risk. Their share price
may fall and consequently the cost of raising new capital in
the markets may rise. As a result, those that do pay regular
dividends go to great lengths to maintain the payout from year
to year. This can have the effect of squeezing cash flow
that might better be used for other purposes.
Dividend cover
The number of times that a company’s annual dividends can
be divided into its annual earnings. So if a company’s after-
tax earnings in a year are $20m, and it pays out $2.5m in divi-
dends, that year its dividend cover is eight.
This is similar to the dividend payout ratio, a concept popular
in the United States. The dividend payout ratio is the percentage
of the company’s earnings paid to shareholders in cash. With
companies in old, mature industries (called value stocks), it
is generally high (and the dividend cover is therefore low). But
for young growing businesses (or growth stocks) that need
capital for reinvestment, it is usually low (and the dividend
cover is high).
Documentary credit
A method of financing trade. banks provide the buyer of goods
with credit to pay the exporter on the strength of documents
which prove that the buyer has proper title to the goods. This is
useful when documents reach the buyer more quickly than the
goods themselves.