The Wall street journal reported (April 13, 2007) that shareholders of Kraft Foods “can afford to give management more time to improve its brands, sales margins, and earnings” because of the dividends paid by the company and the share buy-back program. Kraft foods has been losing market share in its cheese and processed-meat products categories and has not been keeping up with private-label competition, as well as new food offerings in healthy snacks and foods. However, due to the dividends and buy-backs, share price appreciation is not the only form of return to the investors.
Required
(a) How does a shareholders receive a return on his or her investment in a company?
(b) Do companies that pay dividends have creation advantages over companies that do not pay dividends and choose to retain all earnings?
(c) What signs will investors look for to see if Kraft’s management is successful in its strategy? Where in the financial statements will this evidence be presented?