Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
“Dividends are real money. That's the hallmark of a blue chip stock. If a company doesn't pay a dividend, it's a speculation.”
Geraldine Weiss (Sullivan, “Dividend Stocks Pay Off”)
•(When) asked if the company planned to start paying a dividend or initiate a stock buyback program, "At this time, we have no plans to do either. We don't think it's our job to manage our shareholders. It's our job as the management team to manage the company, to manage it through when the stock price is going up and to manage it when the stock price is going down.”
Steven Jobs (Hillis, “Apple Plans no Dividend or buyback”)
GAINESBORO MACHINE TOOLSPAYOUT POLICY FOR A NEW IDENTITY
Clay FowlerJabbar Jamison
Applied Business Finance UNC Charlotte MBAD 6154
AGENDA
Applied Business Finance UNC Charlotte – MBAD 6154 Gainesboro Case Analysis
• Gainesboro• Their dilemma
• Payout policy• Dividends
• Relevant theories• Repurchases• Signaling• Payout policy in the 21st century
• Recommendation• Forecasts and supporting evidence
• Suggested Readings
…
GAINESBORO
Gainesboro Case Analysis
• Conventional industry: Machine tools manufacturing
• Historically strong earnings and regular dividends
• 25% of revenue
• New industry: CAD/CAM software industry
• Expensive restructuring
• Enormous growth potential, domestic and international
Applied Business Finance UNC Charlotte – MBAD 6154
…/Gainesboro_and_their_dilemma
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
GAINESBORO MACHINE TOOLS CORP.
Consolidated Income Statements (in thousands of dollars, except per-share data)
Shares Outstanding 18,600,000
For the Years Ended December 31, Projected
2002 2003 2004 2005
Net sales $ 858,263 $ 815,979 $ 756,638 $ 870,000
Cost of sales 540,747 501,458 498,879 549,750
Gross profit 317,516 314,522 257,759 320,250
Research & development 77,678 70,545 75,417 77,250
Selling, general, & administrative 229,971 223,634 231,008 211,500
Restructuring costs 65,448 0 89,411 0
Operating profit (loss) (55,581) 20,343 (138,077) 31,500
Other income (expense) (4,500) 1,065 (3,458) (4,200)
Income (loss) before taxes (60,081) 21,408 (141,534) 27,300
Income taxes (benefit) 1,241 8,415 (750) 9,282
Net income (loss) ($61,322) $12,993 ($140,784) $18,018
Earnings (loss) per share ($3.25) $0.69 ($7.57) $0.98
Dividends per share $0.77 $0.25 $0.25 $0.39
…/Gainesboro_and_their_dilemma /Income_statements
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
DILEMMA
• Two expensive realignments
• $61.3 million loss in 2002
• $140 million loss in 2004
• Still paid $.25 / share dividend
• Share price down 24% from one year ago
• Avg$29.15 in 2004, currently
…/Gainesboro_and_their_dilemma
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy
PAYOUT POLICY
How can a company increase its value through its choice
of distribution policy, defined as the level of distribution, the
form of distribution, and the stability of distributions?
• Optimal distribution policy
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Dividends_and_dividend_theory
DIVIDENDS AND DIVIDEND THEORY
• Dividend Irrelevance Theory
• Distribution method is irrelevant to firm value
• Investor creates their own distribution
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Dividends_and_dividend_theory
DIVIDENDS AND DIVIDEND THEORY
• Bird-in-hand theory
• Suggests dividends preferred over capital gains
• Reliability trumps potential
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Dividends_and_dividend_theory
DIVIDENDS AND DIVIDEND THEORY
• Tax preference theory
• Capital gains preferred over dividends
• Capital gains taxes are avoidable and deferrable
• Tax liability begets dividend avoidance
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Dividends_and_dividend_theory
DIVIDENDS AND DIVIDEND THEORY
• Clientele effect
• Different strokes
• One clientele is as good as another
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Stock_repurchases
STOCK REPURCHASES
• Buybacks via open market or tender transaction
• Boosts EPS
• Adjusts capital structure
• Flexibility / Timing effects
• Signals confidence in future earnings
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Signaling
SIGNALING
• Information implicitly revealed
• Market uses and consumes information content
• Emperical studies show …
• Potential consequences
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/_in_the_21st_century
PAYOUT POLICY IN THE 21ST
CENTURY• 66.% in 1978 to 20.8% in 1999
• Lower propensity to pay
• Changing company characteristics
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Recommendation/Alternatives
THE ALTERNATIVES
• Alternative options
• Various dividend payout ratios (exhibit 8a)
• 40%
• Residual dividends (18%)
• Revenue-mix adjusted dividend (~10%)
• 0%
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Recommendation
RECOMMENDATION
• Zero-dividend high-growth stock with residual
repurchases
• New industry offers considerable growth opportunities
• Prior income-seeking clientele have divested
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Recommendation/Optimal
Exhibit 4 - Revised
GAINESBORO MACHINE TOOLS CORP.Stockholder Comparative Data, 1994 and 2004(thousands of shares)
1994 2004 Percentage Change in Clientele
Shares Percentage Shares Percentage
Founders' families 2,390 13% 2,421 13% 0%Employees and families 3,677 20% 3,155 17% -15%Institutional investors
Growth-oriented 2,390 13% 1,138 6% -53%Value-oriented 1,471 8% 2,421 13% 63%
Individual investorsLong-term; retirement 6,803 37% 4,806 26% -30%Short-term; trading-oriented 919 5% 2,421 13% 160%Other; unknown 735 4% 2,239 12% 201%
Total 18,385 100% 18,600 100%
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Recommendation
RECOMMENDATION
• Zero-dividend high-growth stock with residual
repurchases
• New industry offers considerable growth opportunities
• Prior income-seeking clientele have divested
• Industry peers comparison
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
Annual growth rate of cash flow (%)
Sales ($mm) Last 5 yearsNext 3-5
years
Current payout
ratio (%)
Current dividend yield (%)
Debt/ equity (%)1
Insiderowner- ship
(%)P/E ratio
(x)
Gainesboro Machine Tools Corp. 504 (1.5) 15.0 0.0 0.0 28.0 30.0 nmf
CAD/CAM companies (software and hardware)Autodesk, Inc. 1,234 4.5 10.5 6.0 0.3 0.0 3.2 25.3 Ansys, Inc. 135 16.5 13.0 0.0 0.0 0.0 4.4 23.3 Cadence Design 1,198 (1.5) 6.0 0.0 0.0 24.7 3.5 21.4 Intergraph Corp. 551 (8.0) 12.0 0.0 0.0 0.2 3.1 25.7 Mentor Graphics 711 4.5 2.0 0.0 0.0 65.5 5.9 21.9 Moldflow Corp. 49 nmf 11.5 0.0 0.0 0.0 15.4 36.2 Parametric Technology Corp. 660 (6.5) 6.0 0.0 0.0 0.0 5.4 33.4 Synopsys, Inc. 1,092 6.5 6.0 0.0 0.0 0.0 5.6 26.5
Electrical-industrial equipment manufacturersCooper Industries, Inc. 4,463 1.5 3.0 39.0 2.4 30.6 1.0 16.4 Emerson Electric Company 15,615 2.5 3.5 54.0 2.6 43.3 0.8 20.5 Hubbell Inc. 1,993 5.0 6.0 52.0 3.0 21.1 2.9 17.6 Thomas & Betts Corp. 1,516 (10.0) 5.0 0.0 0.0 60.2 2.4 17.7
Machine tool manufacturersActuant Corp. 976 (21.5) 12.5 0.0 0.0 180.8 5.9 19.1 Lincoln Eletric Holdings, Inc. 1,334 2.5 10.0 32.0 2.2 28.4 5.2 15.0 Milacron, Inc. 774 (15.5) (2.5) 0.0 0.0 468.1 4.6 nmfSnap-On Inc. 2,407 5.0 3.5 71.0 3.1 18.3 3.0 22.9
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
…/Payout_policy/Recommendation
RECOMMENDATION
• Zero-dividend high-growth stock with residual
repurchases
• New industry offers considerable growth opportunities
• Prior income-seeking clientele have divested
• Industry peers comparison
• Repurchases: Flexibility and signaling effects
• Pursue re-branding initiatives
Gainesboro Case AnalysisApplied Business Finance UNC Charlotte – MBAD 6154
CLASS COMMENTARY