Financial Accounting Blog

Thursday, September 25, 2003

Reuters reports that Eastman Kodak Co. (EK), which has been battling shrinking sales of film and cameras, on Thursday slashed its dividend for the first time in its almost 120-year history, sending its shares to a record low. Recall that the value of a stock is based on two factors: 1) ability to predict future cash flow and 2) amount of risk (real or perceived). Given Kodak's history of increasing dividends since 1902, the recent management decision to reduce it and investors' concerns about its cash flow & debt level resulted in the significant drop in its stock price. To investors, both future cash flow and risk are uncertain in today's more competitive environment.
Kodak reduced its dividend by 70 percent, the first cut since it started paying a dividend in 1902.

The Rochester, New York-company said cutting the dividend would give it financial flexibility as it shifts away from investing in film products and widens its range of digital products.

"The downgrades reflect concern about Kodak's earnings and business profile ... and the need to reduce debt, which remains elevated given Kodak's rising business risk and investment strategies," S&P analyst Steve Wilkinson said in a note.

S&P, which warned in June that it might cut Kodak's ratings due to concerns about cash flow and debt reduction, on Thursday said its outlook on the company was stable because the dividend cut will help Kodak reduce its debt while investing for growth.

Analysts questioned how efficiently -- and how soon -- Kodak, which has undergone several reorganizations in recent years to counter an anticipated decline in film sales, could remake itself.

"It's going to take investors a long time to feel comfortable with their strategy and see results," said analyst Shannon Cross of Cross Research. "The big problem with the stock now is that there are so many unknowns."