Question

What is the impact on free cash flow if dividend payout ratio is being increased?Is it a good sign for a company?

Answer 1

There is no impact of dividends payout ratio on the free cash flow as the Free cash flow whether to the firm or to the equity is calculated with the net income which is before the dividends are paid. Free cash flows has impacts on dividends and not the vice versa. Free cash flow decide the amounts to be paid as dividends.

If dividend payout ratio is increased means company do not have any good investment opportunities to invest in and hence the profits are not retained and paid off to the shareholders. This means the growth of the company is the future is bleak and questinable and company should start looking for growth through profitable investment opportunities.