Essay on Flatbussh Shipyard Case
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 …show more content…
Basically we can find two options as far as stable dividend policy is concerned:
- maintain a stable dividend payout ratio at 50% and let the dividends adjust to the earnings;
- implementing a dividend policy with a moderately growing dividends level.
So the first issue is to determine weather the share price is fluctuating because of changes in dividend level or because of the uncertainty on future growth opportunities, since this is a very cyclical business.
Concerning the share price fluctuation and the dividend level, we calculated the correlation, of both variables, and we got 0.83, as seen. This means that there is a very strong positive relation between dividend and price.
About future growth opportunities, we feel that is very difficult to have expectation in the long term, due to the cyclical business where the company is inserted. We can look to the P/E ratio and see that it has been growing for the last three years but we don’t really think that this is a result of good future growth opportunities but a result of the decreasing level of earnings per share.
Considering this we don’t really feel that the first policy could be a very stable dividend policy, looking to the correlation and also to the future growth opportunities. About the second option, let’s say that it can have the reverse of the medal, this means that implementing a very low level of dividends may have a negative signalling effect, although we