Issue: What dividend policy should Southboro Corporation adopt in the long-term?
Southboro is a publicly-traded Company with 51% owned by public. It is currently engaged in the sale of CAD/CAM equipment (45% of total revenues), presses and molds (40% of total revenues), miscellaneous machines (15%). The firm has just completed a restructuring of its operations in the face of declining sales and has suspended payment of dividends during the 1st semester of 1988.
After completion of the restructuring, the Company is shifting focus and is looking forward to tap the emerging CAD/CAM market. The Company aims to derive 66% of its revenues in the next 5 years from the CAD/CAM segment, and the remaining from presses and molds. With this strategy, the Company is forecasting an annual growth of 15% in sales.
The Southboro long-term plan, however, is beset by unfavorable business and economic conditions namely: intensified competition with competitors expected to come up with a similar CAD/CAM technology in the next 12 months, a highly cyclical artificial workforce industry, a weakened US growth.
The US economy faces decreased industrial production and consumer spending.
With this, the Company is contemplating on determining dividend policy that would best serve the interests of the stockholders but will not hamper the long-term plans of the Company.
The group recommends that a dividend be granted because dividend payment conveys a strong signal that the Company is benefiting from the restructuring that has taken place the past 2 years and is looking forward to a turn-around in operations. Further, the group deems it best that because stockholders are holding on to their stocks in anticipation of dividend payments, it may drive down price if the Company decides to stop payment all-together.
Over a long-term horizon, the group recommends that the Company...