Flatbussh Shipyard Case
Case study 2: Flatbush Shipyards, Inc.
Case Summary:
Flatbush Shipyards, Inc. has just received a substantial increase in backlog orders from the U.S. Navy. In relation, some issues arise concerning an alteration of the current dividend rate.
The current EPS of the company is now $14-$15. Historically, the dividend payout ratio mounts to an average 50%. So, the company expects payout the payout in 1959 to be $7/share. In the previous year the dividend rate was cut from $1.3 to $1.2 per share. But after the new deal, the CEO proposed a hike in the quarterly payout to $1.6 per share from the $1.2 given at present. The CEO even suggested the dividend rate to be propped up to $1.80 in 1960.
One thing to mind is that the company’s share price is marked high volatility. Davis, the Chief Financial Officer, associated the fluctuations with speculative trading. He argued that the variability in dividend payouts contributes substantially in fuelling the speculation. Therefore, Davis is not in favour of the CEO’s dividend policy proposal. He thus suggested a radical change in dividend policy by paying a constant dividend of $1.20, while putting excess cash into a reserve. This measure will help stabilize the stock price by dampening the uncertainty in dividend payouts.
However, Davis’ proposal has received resistance from a number of company officials because:
1. No other firm had adopted a similar dividend policy. Mr Davis’ proposal could not be tested in advance.
2. Objections of shareholders are not taken into account.
3. The opportunity cost of maintaining the reserve is high (assuming it is invested in government bonds).
4. Flatbush is a cyclical company. Changing the dividend policy could alter the composition of the clienteles.
5. The maintaining of the $1.2 dividend level in May alone precipitated a decrease of almost 12% within 2 weeks.
Below are some characteristics of the company:
Company revenue:
Characterised by high volatility
Case Summary:
Flatbush Shipyards, Inc. has just received a substantial increase in backlog orders from the U.S. Navy. In relation, some issues arise concerning an alteration of the current dividend rate.
The current EPS of the company is now $14-$15. Historically, the dividend payout ratio mounts to an average 50%. So, the company expects payout the payout in 1959 to be $7/share. In the previous year the dividend rate was cut from $1.3 to $1.2 per share. But after the new deal, the CEO proposed a hike in the quarterly payout to $1.6 per share from the $1.2 given at present. The CEO even suggested the dividend rate to be propped up to $1.80 in 1960.
One thing to mind is that the company’s share price is marked high volatility. Davis, the Chief Financial Officer, associated the fluctuations with speculative trading. He argued that the variability in dividend payouts contributes substantially in fuelling the speculation. Therefore, Davis is not in favour of the CEO’s dividend policy proposal. He thus suggested a radical change in dividend policy by paying a constant dividend of $1.20, while putting excess cash into a reserve. This measure will help stabilize the stock price by dampening the uncertainty in dividend payouts.
However, Davis’ proposal has received resistance from a number of company officials because:
1. No other firm had adopted a similar dividend policy. Mr Davis’ proposal could not be tested in advance.
2. Objections of shareholders are not taken into account.
3. The opportunity cost of maintaining the reserve is high (assuming it is invested in government bonds).
4. Flatbush is a cyclical company. Changing the dividend policy could alter the composition of the clienteles.
5. The maintaining of the $1.2 dividend level in May alone precipitated a decrease of almost 12% within 2 weeks.
Below are some characteristics of the company:
Company revenue:
Characterised by high volatility