Our main concern with Eastboro is their current dividend policy. With their current 40% dividend payout ratio, they will have to continue to borrow money to pay their dividend until the end of 2006. In 2007, they finally see an excess of cash after the dividend. With this current ratio, Eastboro’s hope to expand more in the international market is very restrained. Since management does not like to take on debt, they theoretically won’t expand until 2007. However, with the recent restructuring of the company and recommendation of a name change, we feel that the dividend policy needs a make-over, as well. Management wants to focus their energy to moving the image of the company to more of a growth company as opposed to a high dividend paying mature company.
To obtain this image, the dividend payout ratio needs to be lowered drastically to a payout ratio of 10%. With this decrease in the payout, the new Eastboro Advanced Systems International (EASI) will convince shareholders of their change to a growth company. Switching to a 10% payout ratio allows Eastboro to see excess cash by 2004, rather than 2007 with the current ratio, giving them the ability to fund the international growth sooner. This will also attract new investors, which in the short-term will offset the expected loss of some current shareholders. We feel that this change will help increase the value of the company and the upside will, in the future, outweigh the downside.
Martin Manufacturing Company Historical Ratios RATIOS ACTUAL 2001 ACTUAL 2002 ACTUAL 2003 INCREASE (DECREASE) INDUSTRY AVERAGE Current ratio 1. 7 1. 8 2. 5 0. 7 1. 5 Quick Ratio 1. 0 0. 9 1. 3 0. 4 1. 2 Inventory turnover (times) 5. 2 5. 0 5. 3 0. 3 10. 2 Average collection period (days) 50. 0 55. 0 58. 0 3. 0 46. 0 Total asset turnover (times) 1. 5 1. 5 1. 6 0. 1 2. 0 Debt Ratio (%) 45. 8 54. 3 ...
The idea behind reducing the payout to 10% is that EASI will be able to consistently reach this target. At the end of each year, after all projects have been funded, EASI will be able to issue a special dividend to shareholders. With this ability, Eastboro will not have a problem retaining the shareholders or obtaining new shareholders.
The recent attack on September 11, 2001 has caused the market to see some low results. Since the stock price has fallen from $30 to $22.15, this would be a good opportunity for EASI to repurchase some stock to help increase the value to the shareholders. Repurchasing some stock at this point will signal to shareholders that management feels strongly about the restructuring of the company. This, also, will give the shareholders the confidence to remain with the company.
We recommend that Eastboro change their name to Eastboro Advanced Systems International, Inc. to introduce the company as heading in the new direction of becoming a more technology advanced company. We also recommend reducing the dividend payout to 10%, as well as the repurchase of stock at the current price to help increase value. This will reduce the company’s dependency on borrowed funds, reducing the forecasted loss of the company and making them more profitable in shorter time period.
This will give them increased cash flows to reinvest in CAD/CAM research to keep the company on the leading edge of advancement of their Artificial Workforce and related products at home and abroad. Along with the change in company dividend payout policy, a statement should be issued to inform the stockholders of the company’s direction and the continued importance to improve the company’s CAD/CAM products. To maximize shareholder wealth, we will be sticking to a 10% dividend in the future with the possibility of special dividends. With these changes, Eastboro will be signaling their focus on becoming a high growth stock.
The issue of how much a company should pay its stockholders, as dividend is one that has been of concern to managers for a long time. The optimal dividend policy of a firm may be defined as the one that increases shareholders wealth by the greatest amount. It is therefore necessary, to understand the nature of the relationship between dividend and value of the firm. It is in the light of this that ...
Overall group five did a very good job addressing the major issues in this case. They tackled the issues of the dividend policy, the proposed name change for Eastboro, and whether or not to buy back shares of stock.
We agree with much of their analysis and recommendations. By lowering the dividend policy to 15%, they are allowing a larger portion of funds to be used for future research and development, an idea we agree with. By cutting this percentage back from a current rate of 40%, there will obviously be a reaction by both current and prospective stockholders. By approving the name change to Eastboro Advanced Systems International, they are signaling to the street that they are committed to future growth, and will no longer be able to be relied upon for high dividend payouts. We also like the fact that they did a dividend valuation, showing that Eastboro is currently under-valued, and does have a strong future.
The only major issue we have with their analysis is a couple mistakes in the data they used. In reporting net income for 2001 in their forecasts for potential dividend payouts, they used 8. The correct number here, as given by the text, is 18. Also, they used the wrong depreciation data in several years in this forecast. These mistakes would have been realized if they had reviewed their brief adequately. These mistakes skew the numbers enough to mislead readers, showing the wrong timeframe for excess cash.
In conclusion, group five did a very good job on the major issues in this case. However, they should have taken more time reviewing some of their data to ensure accuracy.
There are several limitations in this case. One of the main issues is what kind of fallout will be produced by the cutting of the dividend payout from the current rate of 40% to a rate of 10%. We are assuming that those who are currently holding the stock for these large dividend payments will either stay with Eastboro, or will be replaced by new investors whose goals better represent Eastboro’s vision.
1. Dividend Growth ModelThe basic assumption in the Dividend Growth Model is that the dividend is expected to grow at a constant rate. That this growth rate will not change for the duration of the evaluated period. As a result, this may skew the resultant for companies that are experiencing rapid growth. The Dividend Growth Model is better suited for those stable companies that fit the model. ...
We are also forecasting all numbers with an assumed growth rate of 15%, which obviously has the possibility, if not the probability of fluctuating below or above this number. Also, we are assuming the recent focus on the CAD/CAM technology will be profitable for Eastboro in the long-run, and that this new vision will create value for shareholders.
Lastly, we are assuming that the market as a whole will perceive this move for what it is, a change in focus for a solid company with high potential for future growth. An alternative would be that people would look at the cut in dividends for a company who had historically paid them as a signal of weakness for Eastboro. We’re going with the assumption that the name change, as well as proper marketing practices by Eastboro should adequately address this problem.