Question

HARLAND CORP has been in existence for 45 years. Over the past, 6 years the stock price has stagnated and remained between $22.15 and $22.82. The CEO, who started the company, believes that the stock price needs to be higher, and the best way to do that is to pay a dividend to increase the demand for the stock. The company has never paid a dividend in their history. The CEO needs to determine what type of dividend policy to follow, and how much the first dividend should be, so he comes to you for advice. He provides you with the following historical information as it relates to the company’s earnings per share (as an aside, dividends per share should not exceed EPS unless the firm is liquidating):

YEAR                                                      EPS

                2017                                                       $2.36

                2016                                                       $2.12

                2015                                                       $0.81

                2014                                                       $2.01

                2013                                                       $2.09

                2012                                                       $2.44

                2011                                                       $2.31

                2010                                                       $2.01

You are to prepare a brief memo (1 page, single-spaced) as to what dividend policy you recommend, why you recommend it, what initial dividend amount you recommend, and why you recommend that amount.

3 types of dividend policy (Stable dividend policy, constant dividend policy, and residual dividend policy)

Answer 1

Dividends are a share of the earnings of the company that it passes to the shareholders of the company.

Harland Corp since its very existence of 45 years and never given dividends i.e it has reinested the profits / earnings of the company back into the company. However, over the last 6 years, its share price has been stuck and very stagnent.

For a mature company with stable earnings that doesn't need to reinvest as much in itself, payout to shareholders in the form of dividends can be a good idea

• Many investors like the steady income associated with dividends, so they will be more likely to buy that company's stock.
• Investors also see a dividend payment as a sign of a company's strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive. Since the demand and price of the stock are directly proportional, a greater demand for a company's stock will increase its price.

Given the premise above, the company should go for stable dividend policy. The goal of the policy is steady and predictable dividend payouts each year, which is what most investors seek. When earnings are up, investors receive a dividend, and when earnings are down, investors receive a dividend. The goal is to align the dividend policy with the long-term growth of the company rather than with quarterly earnings volatility. This approach gives the shareholder more certainty concerning the amount and timing of the dividend and increases the demand and thereby increasing the price of the stock.

This policy does not imply that the dividend per share will never be increased.

When the company reaches new levels of earnings and expects to maintain it, the annual dividend per share may be increased.

The company should give a stable dividend of $0.60 per share to the shareholders and maintain a stable dividend policy i.e the payout of dividend varies from 20-30 % in most of the years.

the stability of dividend should increase the preference of the shares and increase demand of the stock and thus result in increase of price.

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