Ashland Inc (NYSE:ASH) is a large and diversified chemicals company currently in the middle of some major changes that it hopes will increase shareholder value and boost earnings potential. So, the answer to the income investor's question, "Will Ashland Inc Raise its dividend in 2016?" would seem to be an easy yes. But the changes in store for this year are big, and that means some uncertainty remains.

A company in transition
Ashland has been moving in recent years to improve its business mix by selling less-desirable operations and expanding or acquiring better ones. For example, the company closed its purchase of AkzoNobel's Zeta Fraction technology, which "broadens Ashland's value-added portfolio in the personal care, pharmaceutical, food and beverage, and agriculture markets." These are core growth markets for the company. Meanwhile, it sold its industrial biocides business so it could focus on things it believes have better prospects -- like the Zeta technology.   

Big changes at Ashland are about to get even bigger. Image source: Ashland.

But the really big change, which is the culmination of all the work that's been done to remake Ashland's business, is the planned spinoff of Valvoline. It's a logical move since Valvoline has its own brand image and is focused around motor oil and performing physical oil changes, not chemicals. But this business represents nearly 40% of Ashland's revenues, so the spinoff is a huge change, and it will likely have a big impact on the dividend.

For example, when DuPont (NYSE:DD) spun of Chemours (NYSE:CC), its dividend went from a quarterly rate of $0.47 a share at the start of 2015, before the split, to a fourth-quarter rate of $0.38, after the separation. A dividend from Chemours was expected to make up the difference (more on this later).

Sum of the parts
Ashland has increased its annual dividend for more than five consecutive years. It clearly has some dedication to rewarding investors in this way, but a company can't lose 40% of its top line and expect to maintain its current dividend payment. Since the spinoff is likely to close in calendar year 2016, it's going to have a big impact on the dividend.

So, the question is, what's likely to happen? It seems reasonable to expect Ashland to trim its dividend to a level that's consistent with its current payout and future revenues after it jettisons Valvoline and 40% of its top line. In other words, expect Ashland to pay as much as 40% less in dividends after the spinoff. But that's not the end of the story.

A normal move for spinoffs of dividend-paying companies is for the spinoff to start paying its own dividend. In this case, Valvoline is likely to pay a dividend that "makes up the difference," just as was expected with DuPont's spinoff of Chemours. So, taken together, the total Ashland investors receive will likely be at least the same dividend, though the payout will be split between each individual company. You'll need to look at the sum of the parts. At least, that's likely to be the plan.

Still, it's worth noting that this scenario didn't play out as expected at DuPont. Chemours' dividend, for various reasons, turned out to be just $0.03 a share. Worse, DuPont shareholders received only one share of Chemours for every five DuPont shares they owned. Chemours dividend was not nearly enough to make up the cut in DuPont's dividend. Essentially, DuPont shareholders took a very real dividend cut despite the best laid plans.

Ashland, after the split. Image source: Ashland.

When and where
All of that said, Ashland has historically increased its dividend in the middle of the year. The last hike was in May of 2015 -- a hefty 15% increase. But if that date holds, a dividend increase is likely to happen before the spinoff. Note, however, that even if there is no increase, because of the mid-year hike in 2015, Ashland will pay more in 2016 than it did in 2015. So, a year-over-year dividend advance is already baked in the cake, but a hike is likely all the same.

The dividend, then, if you aren't paying attention, could look like it took a haircut after the corporate break-up, which is why you'll want to pay close attention to the dividend details of the Valvoline spinoff. Understanding what's going to happen will be key to understanding if continued dividend increases have been obscured by the corporate separation. However, DuPont and Chemours are a warning sign that, if you aren't careful, this corporate action could also obscure a very real dividend cut.

So, will Ashland increase its dividend in 2016? You'll have to watch the Valvoline spinoff to know for sure.