Question

can a company with negative earnings pay dividends? what could be the possible explanation for this?

Answer 1

Is it legal to pay a dividend to shareholders if a private/public company has negative retained earnings?

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8 ANSWERS



Antoun Nabhan, Finance exec, former buy-sider, serial entrepreneur, multiple exits.

Answered Aug 14, 2018

Yes, this is legal. Note that retained earnings is a balance sheet account, so what you’re really asking is mixing a disbursement in the *current* period with the accumulated earnings since inception.
What you’re probably really asking is whether a company can pay a dividend when their net income(a P&L account denoting earnings in the current period) is negative. This is also legal to do (at least for a US company), provided that the company is not in the “zone of insolvency.”
While it’s not exactly prudent to do as a routine practice, I suspect it happens with some frequency in the case of companies that either (1) have large fixed costs, and a shareholder base that insists on dividends, are experiencing *temporary* negative earnings due to a cyclical change, and still have ample cash and marketable securities on the balance sheet, or (2) have good operating cash flow, but a negative GAAP net income due to one-time non-cash accounting charges or some large cash investment that is creating a idiosyncratic charge on the P&L.
Always remember: GAAP Net Income is subject to many non-cash adjustments. It’s basically poetry. Operating cash flow, by contrast, is a fact.