Best Ski Manufacturer usually pays a cash dividend sufficient to give investors a dividend yield (annual dividend divided by stock price) of around 6%. Last quarter, Best
Ski Manufacturer paid a quarterly cash dividend of $1 per share. Its stock price is currently at $65 per share.
In the current quarter, Best Ski has suddenly experienced a big slowdown in ski equipment orders. The vice president of finance unequivocally stated that Best Ski just didn’t have the cash to pay another cash dividend of $1 per share. She suggested that Best Ski make a public announcement explaining the situation to shareholders. This suggestion infuriated the chief executive officer, who subsequently insisted that nothing be done to make the shareholders nervous or pessimistic about Best Ski’s future prospects.
The controller (your boss) came to the rescue with an accounting solution to the problem. He proposed that Best Ski declare a 10% stock dividend in place of the regular quarterly cash dividend. He said that a stock dividend is merely a cosmetic increase in the number of shares, with no associated cash flow, either into or out of the company. However, he claimed that investors would never know the difference between a cash dividend and a stock dividend. The controller’s suggestion was met with enthusiasm by the board of directors.
The shareholder relations department is drafting a press release to announce the 10% stock dividend. Because of your accounting expertise, you have been asked to help with the wording of the memo. What wording would you suggest?