This problem require to analyze the current dividend policy and the possibility of a change in its dividend policy for a real company by studying the following questions:

To examine how much cash the firm has returned to its shareholders and in what form (dividends or share repurchase) and to evaluate whether the tradeoff favors returning more or less.

Key questions:

* Has the firm ever paid out dividends? If so, is there a pattern to the dividends over time?

*Given this firm’s characteristics today, do you think that this firm should be paying more dividends, less dividends, or no dividends at all?

Framework for Analysis:

a)Historical Dividend Policy

* How much has this firm paid in dividends over the past few years?

You may find the firm’s past 5-10 years’ dividend payment data (quarterly dividend per share) on the Morningstar or the firm’s Website. Has the amount of the dividend been constant or has it changed? How has it changed? Calculate or find the firm’s past 5 years’ annual dividend payout ratios and dividend yields. Does the firm appear to follow a constant payout ratio policy? If not, what type of dividend policy does the firm follow? Has the firm paid any special dividend in the past 5 years? Does the firm’s dividend policy provide evidence to support the life cycle hypothesis?How have these dividends related to earnings in these years?

You may plot the firm’s 5-10 years’ dividend per share and earnings per share data in a 2-dimension diagram with the horizontal axis measuring the time. Describe the patterns of the two time series individually (is there any trending high, low, or flat) and correlated (positive, negative, or neither).

b)Firm Characteristics

*How easily can the firm convey information to financial markets? In other words, how necessary is it for it to use dividend policy as a signal?

*Who are the marginal shareholders in this firm? Do they like dividends, or would they prefer share repurchase?

*How well can this firm forecast its future financing needs? How valuable is preserving flexibility to this firm?

*Are there any significant bond covenants that you know of that restrict the firm’s dividend policy?

2. To determine whether the firm should change its dividend policy, based on an analysis of its investment opportunities and comparable firms.

Key Questions:

*Given the current dividend policy (identified in above #1) and the current cash balance of this firm, would you push the firm to change its dividend policy (return more or less cash to its owners)?

How does this firm’s dividend policy compare to those of its peer group and to the rest of the market?

Framework for Analysis:

a)Cash Return to Shareholders

*How much has the firm paid out in dividends each year for the past few years? (see above #1)

*How much stock has it bought back each year for the past few years?

*Cumulatively, how much cash has been returned to shareholders each year for the past few years?

b)Affordable Dividends

What was this firm’s FCFE over the last few years?

What is this firm’s current cash balance?

c)Management Trust

*How well have the managers of the firm picked investments, historically? (look at the investment return section of the firm’s financial reports; such rations as ROA, ROE, ROIC)

*Is there any reason to believe that future investments of this firm will be different from its historical record?

d)Changing Dividend Policy

*Given the relationship between dividends and FCFE and the trust you have in the management of this firm, would you change this firm’s dividend policy?

e)Comparing to Sector and Market

*Relative to the sector to which this firm belongs, does it pay too much or too little in dividends?

*Relative to the rest of the firms in the market, does it pay too much or too little in dividends?

The Reuters site provides some comparative ratios in the individual company ratio page.

Answer rating: 100% (QA)

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