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.Cash flow, Dividends, Earnings per share, Modelling