Analyst Dividend Forecasts and their Usefulness to Investors
Contrary to prevailing thought, dividends and dividend forecasting remain an active and important component of pricing in capital markets. This research examines the evidence.
There is a long-standing assumption amongst academia that dividends are either declining in importance or are sufficiently steady to be almost predictable. In actual fact, the frequency and magnitude of dividends is increasing, particularly amongst non-US firms. This study joins a growing body of literature challenging the common perception that dividends are both 'sticky' and declining in importance. Examining firms from 16 countries over the period between 2000 and 2013, it documents that only 25% of firms maintained their annual dividend in a sample of 16 countries over the period 2000-2013, while the majority either increased (54%) or decreased (21%) their annual dividends.
This study argues that the increasing importance and/or variability in dividend payments has also increased demand for explicit dividend forecasts from analysts. Investors demand dividend information because future dividends bear directly on expected portfolio returns.
This research paper examines:
- the frequency with which analysts forecast dvidends for a large set of global firms;
- the accuracy of analyst dividend forecasts relative to standard time-series estimates;
- whether investors rely on analyst dividend forecasts (rather than alternative time-series estimates) when forming expectations of future dividends;
- whether dividend forecasts convey new information to the market, and
- whether investors use dividend forecasts to interpret persistence of earnings news.
This work is the first to show that (i) individual analyst dividend forecasts are more accurate than dividend estimates based on pay-out adjusted earnings or other extrapolative forecasts, (ii) analysts have a marked skill in producing accurate dividend forecasts, (iii) dividend forecasts convey incremental information beyond that of earnings estimates, target price and stock recommendations, and (iv) analyst dividend forecasts help investors interpret earnings news.
In contrast to the disappearing dividends view in accounting and finance research, these results suggest an increasing emphasis on dividend forecasts, as suggested by increasing coverage, and that analysts' dividend forecasts are an overlooked but important component of the overall pricing in capital markets.
This research paper should be of great interest to investors, managers and academics. A draft version of the research paper is available for download at the link below.