ROCKBORO
CASE STUDY
Background
Dividend Policies
- Zero dividends
Content
- 20% Payout
- 40% Payout
- Residual Payout
Share Buyback Considerations
Pros and Cons of the Corporate Image Change
Final Recommendation
Background
Transformation
Rockboro is a traditional manufacturing company
that is currently trying to transition into a
technology software company.
Road to Recovery
Coming out of the recession, the company's
board holds a very optimistic outlook for the
future of the firm, especially after restructuring
twice.
Dividends?
The question now for Rockboro is what kind of
dividend policy and restructuring plan they
should employ.
Dividend Policies(Zero Dividend)
1
2
3
4
5
Sales Growth
Rate
Net Income as
% of Sales
Dividend Payout
Ratio
Interest
Expense at 6%
Loans
Accumulate
At 15% yearly
2015 at 2.1%, 2016 at
4.0%, 2017 at 5.0%,
2018 at 5.5%, 2019 at
6.0%, and 2020 and
2021 at 6.5%
At 0% yearly
Given
Given
Zero-Dividend Policy
Dividend
100
75
50
25
0
2015
2016
2017
2018
2019
2020
2021
Zero-Dividend Policy
Cumulative Additional Debt
Unused Debt Capacity
60
400
48.02
49.90
51.84
53.86
55.96
302.60
300
46.22
40
227.04
34.90
200
161.62
20
109.56
100
36.51
68.51
24.54
0
2015
2016
2017
2018
2019
2020
2021
0
2015
2016
2017
2018
2019
2020
2021
Zero-Dividend Policy
Pro
Debt to Capital Ratio (%)
The company would position itself as a high-growth, capital
gain stock, which is attractive to wealthy investors.
Earnings are reinvested in the company to stimulate growth
In the long-term, the stock price would likely more rapidly
grow once it has been established as a an technology
industry stock
In the long-term, investors looking for capital gains would
be more interested in a high growth stock.
Creditors would be happy that they aren't paying dividends.
40%
35%
33%
28%
30%
24%
21%
20%
17%
Con
15%
10%
0%
2015
2016
2017
2018
2019
2020
2021
.
The company would transition itself away from its
already established association with dividend
payment.
In the short term, stock price would plummet, as
the company had established themselves as a
dividend-paying stock, which is probably
composed of institutional investors who want
fixed income.
It brings into question the matter of confidence
of management to maintain future earnings
Dividend Policies (20% payout)
1
2
3
4
Sales Growth
Rate
Net Income as
% of Sales
Dividend Payout
Ratio
Interest
Loans
Expense at 6% Accumulate
At 15% yearly
2015 at 2.1%, 2016 at
4.0%, 2017 at 5.0%,
2018 at 5.5%, 2019 at
6.0%, and 2020 and
2021 at 6.5%
At 20% yearly
Given
5
Given
20% Dividend Policy
Dividend
Additional Share Issuances
40
100
39.25
34.13
30
75
27.39
21.84
20
50
17.26
12.01
10
25
5.40
0
2015
2016
2017
2018
2019
2020
2021
0
2015
2016
2017
2018
2019
2020
2021
20% Dividend Policy
Cumulative Additional Debt
Unused Debt Capacity
100
200
86.57
75
89.95
93.45
195.40
97.10
137.71
150
78.54
64.50
50
88.01
100
40.50
48.91
25
50
16.68
0
2015
2016
2017
2018
2019
2020
2021
0
2015
23.30
10.87
2016
2017
2018
2019
2020
2021
20% Dividend Policy
Pro
Debt to Capital Ratio (%)
40%
36%
38%
Compared to zero payout, the decrease in stock
price would not be as severe
This would still position the stock as a highgrowth, capital gain stock, which is still attractive
to wealthy investors.
Creditors would still be happy that the company
is paying lower dividends.
36%
32%
28%
30%
24%
21%
Con
20%
10%
.
0%
2015
2016
2017
2018
2019
2020
2021
The stock price growth may not be as rapid as
that compared to zero-payout.
Aggressive growth strategies require high
investments, opting to payout dividends would
decrease available funds for reinvestment, and
may limit growth.
May signal a weaker commitment on the
technological industry position.
Dividend Policies (40% payout)
1
2
3
4
Sales Growth
Rate
Net Income as
% of Sales
Dividend Payout
Ratio
Interest
Loans
Expense at 6% Accumulate
At 15% yearly
2015 at 2.1%, 2016 at
4.0%, 2017 at 5.0%,
2018 at 5.5%, 2019 at
6.0%, and 2020 and
2021 at 6.5%
At 40% yearly
Given
5
Given
40% Dividend Policy
Dividend
Additional Share Issuances
80
78.49
40
36.9
34.2
68.26
60
30
54.79
43.67
40
20.43
20
34.52
24.02
20
10
10.81
0
2015
2016
2017
2018
2019
2020
2021
0
2015
2016
2017
2018
2019
2020
2021
40% Dividend Policy
Cumulative Additional Debt
Unused Debt Capacity
200
193.85
75
179.30
66.64
166.24
150
147.66
50
115.50
100
37.00
82.84
25
50
46.09
0
2015
2016
8.82
2017
2018
2019
2020
2021
0
2015
11.79
2016
2017
2018
2019
2020
2021
40% Dividend Policy
Pro
Debt to Equity Ratio
40%
40%
40%
40%
38.42%
37.99%
35.60%
33.00%
30%
Stock price would increase to reward the
increase in dividends.
In-line with the 40% average of the electricalindustrial-equipment industry.
It signifies to the public the confidence of the
company to generate consistent profits.
Con
20%
10%
0%
2015
2016
2017
2018
2019
2020
2021
The annual 40% cash outflow would limit the
growth potential of the company, as it would
decrease the amount reinvested.
The internally generated returns are not sufficient
to support this dividend policy, and additional
shares would need to be issued during the years
2016-2018.
The strategy of high dividends is more in-line with
the electrical-industrial-equipment industry as
opposed to the Zero-Low Dividend Policy of the
Tech Industry.
Creditors would be unhappy with such high cash
outflows from the business
Dividend Policies(Residual
Payout)
1
2
3
4
Sales Growth
Rate
Net Income as
% of Sales
Dividend Payout
Policy
Interest
Loans
Expense at 6% Accumulate
At 15% yearly
2015 at 2.1%, 2016 at
4.0%, 2017 at 5.0%,
2018 at 5.5%, 2019 at
6.0%, and 2020 and
2021 at 6.5%
Equal to Excess Cash
Given
5
Given
Residual Dividend Policy
Dividend
Cumulative Additional Debt
75
71.22
60
61.93
46.22
50
48.02
49.90
51.84
53.86
55.96
40
42.44
34.87
25
20
17.05
6.20
0
2015
2016
2017
2018
2019
2020
2021
0
2015
2016
2017
2018
2019
2020
2021
Residual Dividend Policy
Unused Debt Capacity
250
223.06
200
175.99
150
135.34
100.25
100
66.03
50
36.51
24.54
0
2015
2016
2017
2018
2019
2020
2021
Residual Dividend Policy
Pro
Debt to Equity Ratio
This policy would mitigate agency costs, and
investors are likely to reward the company with
increased trust and share price.
Follows the idea that 'dividend policies' are
irrelevant in growing firms.
Creditors may react positively in years of zero or
minimal dividends , but would also more depend
on whether or not excess funds are being first
used to pay off liabilities
40%
35.54%
30%
32.81%
28.74%
25.18%
22.40%
20%
19.90%
17.66%
10%
0%
2015
2016
2017
2018
2019
2020
2021
Con
Despite growing consistently during the
projection period, adopting this policy may result
in a decrease in dividends in future periods,
which the market would react negatively to.
Creditors may react negatively in years of
significant cash dividends, but would also more
depend on whether or not excess funds are being
first used to pay off liabilities
Share Buyback
Considerations
Pros
Has a significant tax
advantage over dividends as
capital gains are taxed lower
than dividends, therefore
investors may prefer
repurchases instead of
dividends
It causes EPS to increase, as
it decreases outstanding
shares
Leads to an increase of stock
price by decreasing total
outstanding shares
Signals confidence in the
company's future to
investors
Can be used as a means to
go private, obtain a
controlling interest, or
manage capital structure
Share Buyback
Considerations
Cons
Despite increase in EPS,
there is no actual effect on
total earnings
Clientelle who would prefer
to receive dividends would
react negatively
Specific to this company ->
investors may be unsure
about the future direction of
the company, since
unpredictable actions can be
a sign of instability
How Would
Shareholders
React to a Share
Repurchase
Announcement?
Employees & Families
May be happy at being able to encash their
shares
Value Oriented / Long-term
Traders / Retirees
Typically upset, because they would much
prefer to receive consistent/constant cash
dividends over time
Growth Oriented / Short-term
Traders
Would gain growing interest on the stock
Investor Profiles according to Exhibit 4: Stockholder Comparative Data
How Would
Creditors
React to a Share
Repurchase
Announcement?
They may benefit more from infrequent
share repurchases, compared to regular
dividends, as this would lead to lower cash
outflows
Creditors would no doubt be
upset for every announcement of
share repurchases
What would the impact be on financing need
and unused debt capacity (propose your own
share repurchase plan)?
In the short term, it would have the same effect on financing need and
unused debt capacity as a declaration of cash dividends. In the long term, there is a
decreased pressure or obligation for cash returns to investors, as there are no
consistent cash outflows, unlike with cash dividends.
Our proposal, therefore, would be to approach institutional value-oriented
shareholders and request for 708k shares at $15.25 per share, and to repurchase
shares once every three years.
Share Repurchase Policy
*assumed zero dividend policy
Stock Repurchase
Debt to Capital Ratio (%)
39.25
40
40%
36%
34%
30%
30%
30
27%
23%
21.84
20
20%
10
10%
19%
17%
5.40
0
0%
2015
2016
2017
2018
2019
2020
2021
2015
2016
2017
2018
2019
2020
2021
Share Repurchase Policy
Cumulative Additional Debt
Unused Debt Capacity
75
300
61.16
50
52.10
63.55
66.02
68.60
54.08
262.39
203.20
200
40.50
138.41
25
86.96
100
60.02
16.68
0
2015
2016
2017
2018
2019
2020
2021
0
2015
28.34
2016
2017
2018
2019
2020
2021
Corporate Image Campaign &
Corporate Name Change
Pros
Cons
In the event that value-investors drop the company,
continuing the corporate image campaign will allow
growth-investors to learn more about the company,
thus giving them an opportunity to invest.
No empirical evidence on its effectivity; no proof that
the stock price would respond positively to the
changes
The changes will enhance Rockboro's visibility and
image in the technology industry market, considering
that Rockboro is currently known as a traditional
equipment manufacturer.
Advertising campaign & name change would cost
$15 Million, which is about 6% of Retained Earnings
& more than 50% of the Projected Net Income for
2015.
Additional spending would reduce funds available for
investment in R&D and other NPV positive projects
Branca, A. & Borges, M. (2010). The impact of corporate rebranding on the firm's market value. Academia. Retrieved from:
https://www.academia.edu/8805156/The_Impact_of_Corporate_Rebranding_on_the_Firms_Market_Value
Assumptions
Recommendations
First four years: 20% dividends
Subsequently, 0% dividends, with a stock repurchase with an equivalent value of
20% of NI at a premium every three years
Cumulative Additional Debt ($ Million)
Dividends and Stock Repurchases ($ Million)
100
30
86.6
89.9
93.5
97.1
27.39
78.5
75
*2019 is a stock
repurchase
21.84
20
64.5
17.26
50
12.01
40.5
10
25
5.40
0
2015
2016
2017
2018
2019
2020
2021
0
2015
2016
2017
2018
2019
2020
2021
Unused Debt Capacity ($ Million)
Debt to Capital Ratio (%)
250
40
224.75
36%
38%
36%
200
32%
30
28%
151.36
150
23%
20
100
88.01
10
48.91
50
16.68
0
20%
2015
10.87
2016
23.30
2017
2018
2019
2020
2021
0
2015
2016
2017
2018
2019
2020
2021