Dee Publications has been in operation for more than 30 years and went public in the early1980s. The company has had net income in every year except one since it went public. The majority of Dee’s cash flows are generated from its operations, and Dee only resorted to significant borrowing when it expanded operations.
Since it became a publicly traded company, Dee Publications has tried to declare a cash dividend every fiscal year, but always declares a cash dividend at least every other year. Last year Dee did not declare a dividend. This year, a significant portion of Dee’s long-term debt is maturing, and declaring a cash dividend this year could lead to a cash flow problem. Dee Publications is gaining market share and sales are up, so management believes that this problem is unique to this operating year.
To satisfy its shareholders without declaring a cash dividend this year, Dee is considering the following options:
• A stock dividend
• A stock split
• No dividend this year, but a mid-year dividend next year
Required:
Discuss how an investor would interpret each of the three options. Include in your discussion the benefits and drawbacks to each choice both from Dee’s standpoint and the investor’s standpoint.