With revenues falling, they have missed two quarters’ worth of dividend payments, and have promised to try to begin repayment of them by the end of 2001. However, to do this, they may need to borrow money, not only In 2001, but In the next several years. Strobe has always been debt averse, so this is an unsettling prospect for them. There are several options being discussed, such as a zero-dividend payout, a 40% payout, and a residual payout policy. This major Issue, as well as what direction the firm is going, and whether that corresponds to the wishes of current warehouses are the main issues needing to be addressed by Ms.
Campbell. FACTS Current dividend policy = Attacks on World Trade Center and Pentagon occurred one week prior Stock has fallen 18% since attacks Firm has committed Itself to resuming dividend payout, presumably In 2001 Potential name change to Strobe Advanced Systems International, Inc. Rated as an “A” company by Value Line Recent decline in net revenues and profit margins Future international growth is expected Involved in high cyclical environment GAP expected to fall from 4% to 1. 6% Largest % of Individual investors are focused on retirement needs
Management expects growth of 15% CAD/CAM and cutting edge technological products will account for 75% of sales in future Expansion through Joint ventures and acquisitions of small software companies Management places “Interests public of shareholders first” Chairman seeks to maximize growth in market value of Steamboat’s stock in future ASSUMPTIONS Name change to Strobe Advanced Systems International changes image positively Core focus shift toward research and development of CAD/CAM products will continue International growth will become a focus of the company Growth rate of 15% is applicable
Investors with long-term focus will remain with company even after the changes are implemented We will pay a dividend in the future We assume a hybrid dividend policy to be most effective in shareholder minimization Managers are focusing on minimization of shareholder value ANALYSIS Our main concern with Strobe is their current dividend policy. With their current 40% dividend payout ratio, they will have to continue to borrow money to pay their dividend until the end of 2006. In 2007, they finally see an excess of cash after the dividend.
With this current ratio, Steamboat’s hope to expand more in the international arrest is very restrained. Since management does not like to take on debt, they theoretically won’t expand until 2007. However, with the recent restructuring of the company and recommendation of a name change, we feel that the dividend policy needs a make-over, as well. Management wants to focus their energy to moving the image of the company to more of a growth company as opposed to a high dividend lowered drastically to a payout ratio of 10%.
With this decrease in the payout, the new Strobe Advanced Systems International (EASE) will convince shareholders of their change to a growth company. Switching to a 10% payout ratio allows Strobe to see excess cash by 2004, rather than 2007 with the current ratio, giving them the ability to fund the international growth sooner. This will also attract new investors, which in the short-term will offset the expected loss of some current shareholders. We feel that this change will help increase the value of the company and the upside will, in the future, outweigh the downside.
The idea behind reducing the payout to 10% is that EASE will be able to consistently reach this target. At the end of each year, after all projects have been funded, EASE ill be able to issue a special dividend to shareholders. With this ability, Strobe will not have a problem retaining the shareholders or obtaining new shareholders. The recent attack on September 1 1, 2001 has caused the market to see some low results. Since the stock price has fallen from $30 to $22. 15, this would be a good opportunity for EASE to repurchase some stock to help increase the value to the shareholders.
Repurchasing some stock at this point will signal to shareholders that management feels strongly about the restructuring of the company. This, also, will eve the shareholders the confidence to remain with the company. RECOMMENDATIONS We recommend that Strobe change their name to Strobe Advanced Systems International, Inc. To introduce the company as heading in the new direction of becoming a more technology advanced company. We also recommend reducing the dividend payout to 10%, as well as the repurchase of stock at the current price to help increase value.
This will reduce the company’s dependency on borrowed funds, reducing the forecasted loss of the company and making them more profitable in shorter time period. This will give them increased cash flows to reinvest in CAD/CAM research to keep the company on the leading edge of advancement of their Artificial Workforce and related products at home and abroad. Along with the change in company dividend payout policy, a statement should be issued to inform the stockholders of the company’s direction and the continued importance to improve the company’s CAD/CAM products.
To maximize shareholder wealth, we will be sticking to a 10% dividend in the future with the possibility of special dividends. With these changes, Strobe will be signaling their focus on becoming a high growth tock. CRITIQUE Overall group five did a very good Job addressing the major issues in this case. They tackled the issues of the dividend policy, the proposed name change for Strobe, and whether or not to buy back shares of stock. Dividend policy to 1 5%, they are allowing a larger portion of funds to be used for future research and development, an idea we agree with.
By cutting this percentage back from a current rate of 40%, there will obviously be a reaction by both current and prospective stockholders. By approving the name change to Strobe Advanced Systems International, they are signaling to the street that they are committed to future growth, and will no longer be able to be relied upon for high dividend payouts. We also like the fact that they did a dividend valuation, showing that Strobe is currently under-valued, and does have a strong future. The only major issue we have with their analysis is a couple mistakes in the data they used.
In reporting net income for 2001 in their forecasts for potential dividend payouts, they used 8. The correct number here, as given by the text, is 18. Also, they used the wrong depreciation data in several years in this forecast. These mistakes would have been realized if they had reviewed their brief adequately. These mistakes skew the numbers enough to mislead readers, showing the wrong timeshare for excess cash. In conclusion, group five did a very good Job on the major issues in this case. However, they should have taken more time reviewing some of their data to ensure accuracy.
LIMITATIONS There are several limitations in this case. One of the main issues is what kind of fallout will be produced by the cutting of the dividend payout from the current rate of to a rate of 10%. We are assuming that those who are currently holding the tock for these large dividend payments will either stay with Strobe, or will be replaced by new investors whose goals better represent Steamboat’s vision. We are also forecasting all numbers with an assumed growth rate of 1 5%, which obviously has the possibility, if not the probability of fluctuating below or above this number.