You’re the treasurer of SuperTech Inc., a high-technology firm in the fast-growing computer business. The management team has recently been trying to decide on a long-term dividend policy. Earnings are good, but the firm has far more investment opportunities than income.
There’s no doubt that the company will need to sell more equity in the near future to fund its growth. Therefore, management wants to do everything possible to maximize stock price, including making the right dividend decision. This morning the chief engineer, Susan Mathematica, came into the meeting and professed to have the answer to the firm’s problems. She said she’s been taking a high-powered finance course at night, and that her instructor assured her that dividends don’t matter to stock price. According to Susan, that’s because investors are perfectly capable of tailoring their own income stream from any investment. Therefore, she suggests not paying any dividends and using the money for projects.
How would you respond to Susan’s suggestion? Do you think she’s missed part of her instructor’s message? Is it possible that her suggestion is right, but for the wrong reason? What would you recommend that SuperTech do?