2006 Headlines

Cornell University Professor Comments on Ford and Dividends

September 19, 2006 | Ithaca, NY - Roni Michaely, professor of finance at the Johnson School at Cornell University, has conducted research on the implications of dividend payments and eliminations. He is available for comment on the Ford Motor Company's announcement that it will suspend payment of the quarterly dividend on its common and Class B stock, as well as a recently completed study "On the Importance of Measuring Payout Yield."

Professor Michaely comments on Ford Motor Company's announcement:

Generally companies eliminate the payment of dividends as a last resort. However, evidence suggests that dividend omission may be the start of bad news.
The reduction or elimination of dividends is often just the tip of the iceberg and company performance subsequent to the reduction/elimination continues to deteriorate.
Advice to investors is hold on to their money. From a historical perspective the stock will continue to decrease relative to the industry for two or three years after the dividend elimination. It can take years before investors will see any recovery in stock prices.

Professor Michaely also offers highlights from a recently completed study "On the Importance of Measuring Payout Yield:"

A new model of predicting stock returns is vastly superior to the traditional dividend model. The Net Payout Model, which includes dividends returned to shareholders and/or stock buy-backs and issuance of more stocks, more accurately predicts the long-term price of stocks.
The traditional model that included only dividends as an indicator of performance fails to include a common method that is widely uses today-stock buybacks, which return money to shareholders (just like dividends). The flip side of this is the issuance of more stocks.
For example, Microsoft (MSFT) announced in August 2006 a plan to purchase up to $36 billion in stock between now and 2011. The stock pays a miniscule dividend, so the new Net Payout Model will have different prediction for Microsoft future returns compared to the old model.