This case refers to Napco Industries and their position to issue cash dividends in 1975. Historically, Napco had paid dividends some years but it was not their way ofmanaging the company, they had been following the policy to retain all after tax earnings for several years.
The company has been generating value as we see on the history of its stock price.Moreover, Napco has been growing, its sales had increased by 34% (with $38.5 million) and total earning after tax increased 6.2% (with $956,000) in 1974. In 1975, Napco would be able to fulfill itsobjective of paying 10% return on beginning shareholders equity based on its successful three quarter year’s earnings.
This improvement in Napco was due to changes in management style. They changed the wayof running the company from a centralized decision making small team and one time contracts revenue driver to a decentralized profit decision making and a market oriented revenue driver where theirproduct could meet known demands. This new approach would enable the company to longer-range financial planning and attain efficiency through changes in its productivity.
Gary Rappaport Napco’s Chairmanof the board and CEO owned 26% of the company outstanding voting securities by 1975 and he supported the new dividend policy described above to initiate in 1976. CEO stated that investors preferredholding stock that promised a cash dividend. In addition, Rappaport discussed the different ways to provide cash to shareholders, referring to buying back shares but he considered it not a consistentpolicy, arguing that a dividend policy was more adequate because of its consistency and it will maintain shareholders happy.
The analysis point of the case consists of what size dividend Napco couldafford to pay out of earnings. It is stressed that similar companies in 1974 paid cash dividends equivalent to 39%-47% of their earnings, and the ratio for all US manufacturing was 33%.