Minicase Dividend Policy

Topics: Dividend, Dividends, Dividend reinvestment plan Pages: 5 (1734 words) Published: December 10, 2012
Dividend Policy
As a young adult in her mid-twenties, Deanna Perez emigrated from Spain with her family to New York City in the early 1950s. Deanna was artistically inclined and loved women’s fashions. Even as a young girl, Deanna had spent hours drawing, designing, and sewing outfits for her dolls; consequently, it was no surprise to her family when she took a job in the fashion industry. It was Deanna’s dream to someday be successful, wealthy, and own her own company. Deanna worked for a few years as an apprentice for various well-known fashion designers, but she grew frustrated because her creativity was being suppressed more and more frequently. She decided that it was time for her to venture out on her own. During her apprenticeship years, she had built quite a reputation as a designer and had managed to save some money so that she could invest in her own firm. In 1960, with her savings and some borrowed funds, she founded Deanna Perez Fashions (DPF).

DPF’s initial target market was the high-quality, high-priced end of the fashion market, and with Deanna’s fresh new ideas the firm was virtually an overnight success. Deanna didn’t let success get to her head; she continued to come up with new fashion ideas and to broaden her market niche. As more and more women entered the workplace, DPF focused on quality, medium-priced women’s suits and casual wear, which were very fashionable and were well received in the marketplace. From 1960–1980, the firm’s EPS grew at an average rate of 13 percent per year. Since then, earnings growth has slowed. Initially, DPF financed exclusively with debt and internal funds. However, in 1965 the company issued stock and went public. The 1965 issue reduced Deanna’s ownership interest to 80 percent. The company continued to grow, but at a slower rate, as did the entire apparel industry. Business soared during expansions and slowed during recessions. Also, DPF was always on the lookout for good acquisitions, so its growth also was boosted by a series of acquisitions. Consistent with its market strategy, the company only acquired designer fashion firms that offered name recognition and quality apparel at a medium price.

From the firm’s inception, Deanna Perez consistently elected to finance with internal funds until they were exhausted, then with debt, and then by issuing common stock. To maximize the availability of internal funds, the firm has never declared a cash dividend, nor has it ever declared a stock dividend or had a stock split. Due to the plowback of earnings, the stock has sold for as high as $350 per share. Deanna Perez frequently stated her strong belief that investors prefer low payout stocks because of their tax advantages, and also that stock dividends and stock splits serve no useful purpose—they Copyright © 1994. The Dryden Press. All rights reserved.

merely create more pieces of paper but no incremental value for shareholders. Also, Deanna felt that higher-priced stocks were more attractive to investors because percentage brokerage commissions are lower on higher-priced stocks than on lower-priced shares. To support her position, she frequently cited the example of Berkshire-Hathaway, whose stock price has risen phenomenally, even though in 1995 it sold for over $32,000 per share and paid no dividends. DPF’s rapid growth required a number of stock issues over the years, and when Deanna died in 1985, her family held only about 35 percent of the common stock. The business was passed on to Deanna’s daughter, Alana, who had inherited her mother’s eye for fashion. Alana was reluctant to see the family ownership diluted any further, so she adopted a policy of financing growth exclusively with internal funds and debt, except that some stock was issued to key employees as part of their compensation packages. To maximize internal funds, Alana continued retaining all earnings, but in spite of this policy, debt rose sharply, and by 1995 the...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Dividend Policy Research Paper
  • dividend Essay
  • Dividend Policy Essay
  • Essay on Dividend Policy
  • Dividend Policy Research Paper
  • Essay on Dividends and Dividend Policy
  • Dividend Policies Essay
  • Dividend Policy Essay

Become a StudyMode Member

Sign Up - It's Free