Gainesboro Machine Tools Corporation

Introduction Company background Dividend payment decisions Policy analysis
Zero dividend payout pros and cons 40% or $0.2 per share pros and cons Residual-dividend payout pros and cons
Conclusion
Founded in 1923
In early days, it has designed and manufactured a number of machinery parts, including metal presses, dies and molds. By 1975, it has evolved as innovative producer of industrial machinery and machine tools.
In 1980, entered in CAD/CAM and established itself as industry leader
Aggressive entry of large foreign firms damped sales

The recent restructuring has improved efficiency and development of Artificial Workforce. System. The company is expected to have good growth in future
For three years in a row since 2000, dividends had exceeded
earnings

In 2003, dividends were decreased to a level below earnings Despite losses in 2004, small dividend was declared
It has not paid dividend in 2005 although it had committed

earlier to pay sometime in 2005
Dividends is considered as a yardstick of a company's prospects Typically, mature, profitable companies pay dividends If a company with a history of consistently rising dividend payments suddenly cuts its payments, investors should treat this as a signal that trouble is looming Steady or increasing dividends is certainly reassuring, investors are wary of companies that rely on borrowings to finance those payments Holding onto profits might lead to excessive executive compensation, sloppy management, and unproductive use of assets
There are three main factors that may influence a
firm's dividend decision:

Free-cash flow Dividend clienteles Information signalling
The firm pays out, as dividends, any cash that is surplus after
it invests in all available positive net present value projects.
It does not explain the observed dividend policies of realworld companies
Most companies pay relatively consistent dividends from one

year to the next and managers tend to prefer to pay a steadily increasing dividend rather than paying a dividend that fluctuates dramatically from one year to the next
A particular pattern of dividend payments may suit one type of stock holder more than another A retiree may prefer to invest in a firm that provides a consistently high dividend yield, whereas a person with a high income from employment may prefer to avoid dividends due to their high marginal tax rate on income A key criticism of the idea of dividend clienteles is that investors do not need to rely upon the firm to provide the pattern of cash
flows that they desire. An investor who would like to receive

some cash from their investment always has the option of selling a portion of their holding.
Stock prices tend to increase when an increase in dividends is announced and tend to decrease when a decrease or omission is announced Managers have more information than investors about the firm, and such information may inform their dividend decisions, which is considered as an indication of firms health As managers tend to avoid sending a negative signal to the market about the future prospects of their firm, this also tends
to lead to a dividend policy of a steady, gradually increasing

payment.
Strength
Value Line rated it as an A Company
Recently restructured Artificial workforce They are expanding
Weakness
Top line and bottom-line are falling
Dividends are not being paid Very conservative
SWOT
Opportunity
World market New technology innovation JVs and acquisitions
Threat
Macroeconomic environment is not conducive New and big players are entering the market Market shock The competitors are catching up
What would be the most strategic, efficient and effective move that the management of Gainesboro should take in managing the firms equity that will not distort the stockholders and assures the companys future.
Pros
Its a growing company and needs the plough back the retained earnings Borrowing for dividend can be avoided Can be positioned as high growth and high technology firms More and more companies are not paying dividends Cash flow will be positive by 2007
Cons
Commitment! Value oriented investors(13%), Long-term retirement people(26%)
they need dividends
DPS fallen from 1.03 to near zero

Stock brokers have a negative sentiments
Pros
Inline with expectation 0.8$/share , the highest since 2001 Show positive sign of confidence Inline with growth Will stay within the 40% debt/equity ratio
Will increase by 10%( a total of ~ 20%)
Cons
Unnecessary increase in debt Growth company needs to plough back 15% growth is too optimistic Positive cash flow will be happen only in 2011, else in 2007 itself!
Even with a 15% growth
If the growth is 10%

Projection s 2005 $ (30.4) 2006 2007 2008 2009 2010 2011
Excess cash
$ $ $ $ (25.3) (23.1) (24.7) (18.1)
$ $ (25.7) (12.0)
Pros
Giving back only excess retained earnings
Cons
Dividend may not be constant
The companys image might be hampered
Borrowing Issuing New Shares
Pros
Will instill confidence
In turn increase the share price
Increase EPS Reduce the dilution
Cons
As of now they have to take debt to buy back shares
Pros
Will increase the brand awareness Might increase share price Long term intangible asset
Cons
Is it required now ? Its not proven, its speculative High cost
Need to restore confidence and need to be growth oriented

They need to pay dividend or repurchase of stock
Paying dividend is better
With 40% the cash flow will become positive only in 2011 But with 30% it will happen in 2009 itself!
Its also safe(10% -20% growth should accompany a dividend of 30%-50%) Its in sync with the industry average
Implement Zero-Dividend Payout Approach

Maximize Excess Cash for future projects Provides Ample Cash for Expansion & Investment Flexible to minimize interest expense & dividend expense which negatively impact its net income goals
Thank You

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What is the company background?

What is the company background?

What are the factors that influence a firm's dividend decision?

What are the factors that influence a firm's dividend decision?

Introduction Company background Dividend payment decisions Policy analysis

In 1980, entered in CAD/CAM and established itself as industry leader

Aggressive entry of large foreign firms damped sales

For three years in a row since 2000, dividends had exceeded

It has not paid dividend in 2005 although it had committed

There are three main factors that may influence a

firm's dividend decision:

it invests in all available positive net present value projects.

It does not explain the observed dividend policies of realworld companies

Most companies pay relatively consistent dividends from one

flows that they desire. An investor who would like to receive

to lead to a dividend policy of a steady, gradually increasing

DPS fallen from 1.03 to near zero

If the growth is 10%

$ $ $ $ (25.3) (23.1) (24.7) (18.1)

Borrowing Issuing New Shares

Increase EPS Reduce the dilution

Need to restore confidence and need to be growth oriented

Implement Zero-Dividend Payout Approach

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