Torstar Case Study

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Problem Statement: The problem is determining what form of dividend policy Torstar Corporation should use to best benefit their shareholders while not sacrificing Torstars ability to acquire strategic investments to maintain capital expenditure requirements. This includes determining policies on dividend payouts, stock repurchases stock splits. This case will be analyzed from the point of view of Robert Steacy, Vice-President of Finance of Torstar Corporation.

Background: On April 28th, 1998, Robert Steacy will meet with the board of directors to discuss his memorandum stating the pros, cons and recommendations with respect to the amount of regular dividends, special dividends and share repurchases. This company is a broadly based information and entertainment communications company with a detailed background located in Appendix A. Some of the factors that will be considered include the debt-to-assets ratio (which should be at 30 percent or 50 percent if there was a suitable strategic acquisition), the stock price, previous regular dividend payouts ($0.26), and of course taxes.

It is often thought that dividend policy doesn’t matter because in a world with perfect capital markets, with ignored taxes and flotation costs, people can create homemade dividends and hence erase the purpose of dividends in the first place. However, in the real world, dividend policy is actually quite important. Firms that pay out dividends typically are showing their shareholders that they are financially sound and have good cash flow. Firms that cut their regular dividend have been known to take a hard hit in stock price because it can communicate financial woes.

Dividend policy is also important because it relates very much to the clientele of who invests in your company. Currently, the clientele that invests in Torstar enjoy hefty dividends and moves away from that would change who has ownership in the firm. When analyzing the correct dividend policy, the most important requirement that must be met is that this decision should maximize shareholder value.

Alternatives: There are a variety of alternatives that could be used for the dividend policy (and a lot of different combinations) however I have identified two main alternatives that I will be analyzing in this case:

Alternative 1: Keep current dividend policy the same with respect to the payment of regular dividends, special dividends and share repurchases.

Alternative 2: Make payment of regular payment plus include payment of special dividend while increasing share repurchases. In order to lower the stock price back to levels prior to the last 5 years (and hence enable more investors to purchase bundles), introduce a stock split.


Alternative 1
First of all, let’s consider the qualitative factors behind this case. Keeping current dividend policy the same is more or less a given considering the repercussions of lowering dividend payout so hence a regular dividend of $0.26 should be issues for both alternatives. Share repurchases thus far for 2008 Torstar are 589,300 Class B shares at an average price of $50.50. There have been no special dividends paid out thus far and no stock splits and hence under this alternative we will not consider any special dividend policy or stock splits. This alternative poses the least amount of risk, however it doesn’t take into account the increased financial flexibility due to the sale of Hebdo. The financial analysis of this alternative is located in Appendix B.

Alternative II
Similar to Alternative I, it is important to keep the regular dividend payout at $0.26 to show shareholders the financial stability of the corporation. However, due to increased cash flow (projected free cash flow of $50 million in 1998) there is also the possibility of introducing a special dividend as well. From the financial results, a special dividend of around 10% of the regular dividend would serve well here. In addition, Torstar should...
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