# Georgia Atlantic Company

Topics: Stock, Dividend, Dividend yield Pages: 14 (4286 words) Published: April 2, 2013
Case 19

Georgia Atlantic Company

Dividend Policy

CASE INFORMATION

Purpose

The purpose of this case is to have students examine dividend policy--cash dividends, stock splits, and stock dividends--from the viewpoint of its effect on corporate share prices.

Time Required

About one and a half hours of student preparation. If the case is to be written up and handed in, double the time required.

Complexity

A--relatively simple.

Flexibility

This case can be used in several ways. In the introductory course, the case can be used as the basic structure for a lecture or as a written assignment in conjunction with lecture and text material. In our more advanced courses, which usually have smaller enrollments, we have found additional uses which produced very satisfactory results. To encourage active class discussion of various aspects of dividend policy, we divide the class into groups and assign each group one or several of the positions with respect to dividend policy. Students then present oral arguments in favor of the particular policy they have been assigned and against the others. Students exhibit a good deal of creativity in developing reasons for following a policy they may or may not believe in.

MODEL INFORMATION

There is no model for this case.

CASE SOLUTION

Question 1

Here are the data calculated from the information in Table 2:

Georgia Atlantic Company Growth Rate _______________________ _______________________ Georgia Atlantic Industry EPS(t) EPS(t-5) Company Average _______________________ _______________________ 1977-1982 \$106 \$100 1.2% 6.2% 1982-1987 109 106 0.6 7.1 1987-1992 143 109 5.6 7.9

P/E Market Value/Book Value _______________________ _______________________ Georgia Atlantic Industry Georgia Atlantic Industry Company Average Company Average _______________________ _______________________ 1977 12.5_ 16.8_ 1.5_ 2.5_ 1982 12.8_ 17.9_ 1.2_ 2.6_ 1987 14.7_ 19.1_ 0.9_ 2.9_ 1992 13.3_ 16.5_ 0.8_ 2.5_

Note that Georgia Atlantic was retaining 100 percent of its earnings, while other firms in the industry were generally retaining between 55 to 75 percent of their earnings. Recall the retention growth model, g = br, where g = the growth rate in EPS, b = the retention rate, and r = the rate of return on equity investment. If a company has a relatively high b, then g should also be relatively high. If g is not high, despite a high b, then r must be relatively low. That is, the firm must be earning a low return on its new equity investments relative to the ROEs of the other companies in its industry. We conclude from this that Georgia Atlantic must be earning a low rate of return, perhaps even a negative return on marginal investments. That, in turn, suggests that the company should pay out some of its earnings to stockholders and let them invest the funds if the price of the stock is to be maximized. All of this suggests that Georgia Atlantic Company has not followed a reasonable dividend policy. (One could, of course, argue that the company has simply not invested wisely, and that its dividend policy would be fine if its investment policy were better. However, most of the academic work on dividend policy assumes that firms are managing their investments as well as possible, and corporate executives would similarly say that they do the best they...