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

what is the brief memo as to what dividend policy you recommend, why recommend it, what initial dividend amount you recommend, and why you recommend that amount.

Answer 1

For the past 6 years, the EPS has ranged between $2.01 to $2.44, except in 2015 when it was $0.81. The stock price has ranged between $22.15 to $22.82.

Thus, the PE ratio has been around 10 for the past 6 years, except in 2015.

To increase the demand for the stock, the CEO proposes to pay a dividend.

A one-time dividend would not serve the purpose, as the view is to increase long-term demand for the stock.

A growing dividend policy, i.e. where the dividend is increased every year is not sustainable as the EPS has been stagnant.

Hence, a fixed dividend policy is recommended. That is, the dividend per share would be kept constant until the company growth revives.

A recommended first dividend would be 10% of EPS, as this is sustainable. Also, enough profits are leftover to reinvest in the company so as to revive growth. Recommended initial dividend is 10% of $2, which is $0.20. It is recommended to keep this dividend amount constant until the company growth picks up.