Case 19 – Georgia Atlantic Company (Dividend Policy)

Critique the 6 alternative dividend policies proposed by Abe Markowitz. Discuss the implications of each for Georgia Atlantic Company. Make your recommendation on which is the best for the shareholders and state the reasons why.

Solution

No Cash Dividends, No Stock Dividend or Split

This strategy will be the worst possible choice for Georgia Atlantic. This is due to the fact that the company’s recent Market-to-Book value is well below 1. This is an indicator that the company has not invested in any profitable projects anymore. The share price of the company will also stay rather constant. This would mean that the price would rarely exceed the optimal range of $20 to $40. It …show more content…
Investors will then be much more comfortable in Georgia Atlantic shares due to its lower share price. However, Georgia Atlantic will have to consider the high capital outlay needed in the cash dividend and the periodic stock dividends.

Share Repurchase Plan

The advantages of this strategy are that since there is no dividend, Georgia Atlantic capital outlay will also be severly reduced. Because of this, there will also be no transaction costs for the stock dividends. This will ensure that Georgia Atlantic have the flexibility to the needs of different shareholders as some of them would prefer to hold their shares as compared to having to resell it back to the company. The disadvantages are that investors tend to expect some kind of dividends from the company and as such they will not be happy. This is especially more so as the share price will remain high and they cannot afford to sell it and expect a gain.

Preferred Choice of Strategy

Georgia Atlantic will be better off having an announced divided policy. As such strategy 1 and 6 is simply out of the question. This is because announced dividend policy will ensure a stable and predictable dividend payments. Shareholders will be pleased of this fact as they tend rely on dividends to meet expenses or for anticipating tax payments. As such, strategy 5 (Cash Dividend, Stock Split and Periodic Stock Dividend) will be the logical choice. Most