Rob Coyte's Blog

A company's share price is an extremely volatile beast. In most case the underlying profits of companies are fairly steady and consistent with good companies growing profits over time. Whilst there may be changes to profit from year to year depending on the operational performance of the company these variances are usually nowhere near as volatile as share price movements. For example the bank share prices at their worst halved but underlying profit has only decreased say 5-10%.
 
Given short term profit uncertainity companies may cut dividends or distributions so as to ensure they have enough cash remaining inside the company to not only meet their current expenses but fund future investments and projects. A lot of companies with high debt levels are also getting pressure from their banks to reduce the level of their debts which means they need to retain cash to repay these loans. In the past some shares have been paying higher dividends and distributions than actual cash earnings obviously this cant be maintained indefintely.
 
Whilst any changes to dividends or distribution effects the investors personal cashflow it is in the investors interests to ensure that the financial security of the company is maintained. Such changes are usually only short term fixes and if the company has longer term issues they then raise cash by either selling core assets or raising additional capital from investors.