The importance of financial planning cannot be overstated. In todays business environment, lenders and investors look more and more at the companys internal projections as a way to isolate themselves from negative consequences down the road. There is additional pressure on companies to provide more long-term forecasts and be as accurate as possible. If a company does not meet its own financial plan and forecasts it is severely punished by the financial markets in the form of sharply declining stock price and enforcement of restrictive covenants set by creditors.

So, financial planning is extremely important not only for the companys own internal purposes, but also the way it is going to be viewed by outsiders. Perception is reality! With that said, consider the following scenario. It is extremely important for a company to be accurate in its financial forecasting when it comes to setting its dividend policy. A company must be able to look at its performance and income statement, forecast it for many years to come, on top of that establish its long-term cash flow (because after all dividends are paid with cash and not with net income) and set a consistent dividend policy that is held accountable to for many years. Does everyone remember the signaling theory? Remember the extremely negative signal a lowered dividend sends to the financial markets about a company? Consequently, when a company cuts its dividend it is normally assumed that it has forecasted its financial statements for years to come and concluded that it will not perform up to previously set operating and financial performance and will simply not have the cash to pay what it promised its investors.

Now, with that said, lets focus on this weeks discussion topic. Post financial crisis period or post oil/commodities bust period that began couple of years ago, many Blue Chip companies, including many banks and oil and mining companies that were once considered the staple of dividend distribution, announced dramatic cutbacks in dividends. As expected, the markets punished these stocks severely and many of these companies that have not returned to their former dividend policies (with some recent rise in dividend levels for U.S. bank) operate with depressed stock prices.

Do you believe that these companies dividend cuts, especially the ones in the banking sector, is a direct outcome of classic financial forecasting that is showing a dark future for many years to come or do you believe that these decisions are more short-term reflecting the current extraordinary economic environment? Do you agree these companies have made the right move considering the punishment their stock price has suffered by the hand of investors? What other examples of companies with significant dividend distribution policy changes you can think about?