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Gainesboro Machine Tools

• Introduction – Company background
• Dividend payment decisions
• Policy analysis
– Zero dividend payout – pros and cons
– 40% or $0.2 per share – pros and
– Residual-dividend payout – pros and
• Conclusion
Company background
• Founded in 1923
• In early days, it has designed and manufactured a number
of machinery parts, including metal presses, dies and
molds. By 1975, it has evolved as innovative producer of
industrial machinery and machine tools.
• In 1980, entered in CAD/CAM and established itself as
industry leader
• Aggressive entry of large foreign firms damped sales
• The recent restructuring has improved efficiency and
development of Artificial Workforce. System.
• The company is expected to have good growth in future
Dividend history
• For three years in a row since 2000, dividends had
exceeded earnings
• In 2003, dividends were decreased to a level below
• Despite losses in 2004, small dividend was declared
• It has not paid dividend in 2005 although it had committed
earlier to pay sometime in 2005
Dividend payment decisions
• Dividends is considered as a yardstick of a company's
• Typically, mature, profitable companies pay dividends
• If a company with a history of consistently rising dividend
payments suddenly cuts its payments, investors should
treat this as a signal that trouble is looming
• Steady or increasing dividends is certainly reassuring,
investors are wary of companies that rely on borrowings
to finance those payments
• Holding onto profits might lead to excessive executive
compensation, sloppy management, and unproductive
use of assets
Factors influencing dividend
There are three main factors that may influence a

firm's dividend decision:

– Free-cash flow
– Dividend clienteles
– Information signalling
The Free Cash Flow
• The firm pays out, as dividends, any cash that is surplus
after it invests in all available positive net present
value projects.
• It does not explain the observed dividend policies of real-
world companies
• Most companies pay relatively consistent dividends from
one year to the next and managers tend to prefer to pay
a steadily increasing dividend rather than paying a
dividend that fluctuates dramatically from one year to
the next
Dividend clienteles
• A particular pattern of dividend payments may suit one
type of stock holder more than another
• A retiree may prefer to invest in a firm that provides a
consistently high dividend yield, whereas a person with a
high income from employment may prefer to avoid
dividends due to their high marginal tax rate on income
• A key criticism of the idea of dividend clienteles is that
investors do not need to rely upon the firm to provide the
pattern of cash flows that they desire. An investor who
would like to receive some cash from their investment
always has the option of selling a portion of their holding.
Information signalling
• Stock prices tend to increase when an increase in dividends
is announced and tend to decrease when a decrease or
omission is announced
• Managers have more information than investors about the
firm, and such information may inform their dividend
decisions, which is considered as an indication of firm’s
• As managers tend to avoid sending a negative signal to the
market about the future prospects of their firm, this also
tends to lead to a dividend policy of a steady, gradually
increasing payment.
Zero dividend
• Pros
– It’s a growing company and needs the
plough back the retained earnings
– Borrowing for dividend can be
– Can be positioned as high growth and
high technology firms
– More and more companies are not
paying dividends
– Cash flow will be positive by 2007
Zero dividend
• Cons
– Commitment!
– Value oriented investors(13%), Long-
term retirement people(26%)
• they need dividends
– DPS fallen from 1.03 to near zero
• Stock brokers have a negative

40 percent dividend
• Pro’s
– Inline with expectation
– 0.8$/share , the highest since 2001
– Show positive sign of confidence
– Inline with growth
– Will stay within the 40% debt/equity
• Will increase by 10%( a total of ~
40 percent dividend
• Con’s
– Unnecessary increase in debt
– Growth company needs to plough
– 15% growth is too optimistic
– Positive cash flow will be happen only
in 2011, else in 2007 itself!
• Even with a 15% growth
– If the growth is 10%
Projection 2005 2006 2007 2008 2009 2010 2011
s – $ (30.4) $ (25.3) $ (23.1) $
Excess (24.7)
$ (18.1) $ (25.7) $ (12.0)

Residual dividend payout

• Pro’s
– Giving back only excess retained
• Con’s
– Dividend may not be constant
• The company’s image might be
• Pro’s
– Will instill confidence
• In turn increase the share price
– Increase EPS
– Reduce the dilution
• Con’s
– As of now they have to take debt to
buy back shares

Corporate image advertising
• Pro’s
– Will increase the brand awareness
– Might increase share price
– Long term intangible asset
• Con’s
– Is it required now ?
– Its not proven, its speculative
– High cost
• Need to restore confidence and need
to be growth oriented
– They need to pay dividend or
repurchase of stock
• Paying dividend is better
– With 40% the cash flow will become
positive only in 2011
– But with 30% it will happen in 2009
• Its also safe(10% -20% growth should
accompany a dividend of 30%-50%)
• Its in sync with the industry average
• Thank You

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