Corporation Is a research and development company, which translates into sporadic cash flows over time. There are times when genius ideas bring in lots of cash flow for the company. However, there are also times where those genius ideas are shelved because no one has an interest in that patent. The ever changing cash flows prove to be difficult for decision making, especially when it comes to whether the company should give back to its investors or not. Hovels is constantly faced tit the predicament of deciding what dividend policy is best for the organization and the Investors.
The compacts CEO listed the stock prices and dividends for us to look at. There are 3 theories of investor preference for dividend versus capital gains: (1) Dividend Irrelevance Theory or Modeling Miller (2) “Bird-in-the-hand” Theory (3) Tax Preference Theory. According to Modeling Miller (MM), the dividend policy has not effect on the stock price of the firm or the cost of capital. This theory states that Investors reinvest the dividends back into the firm and the firm’s value Is only based n the Income produced from Its assets, and not the dividends and retained earnings.
According to the second theory, the “Bird-in-the-hand” theory, dividends are known and stable and capital gains are unknown and uncertain. The dividend is less risky than capital gains. The risk of the firm’s cash flows in the long run is determined by the dividend payout policy according to this theory. According to the third theory, Tax Preference Theory, capital gains are preferred over dividends. Due to time value of money, a dollar paid in the future on taxes has a lower cost than a alular paid on taxes In the present.
Capital gains typically have better tax advantages than dividends, which is why some investors prefer to invest in companies that minimize dividends. Based on the scatter plot, I would have to say that Hovels has chosen a variety of these different theories over the years since they have been paying dividends. When the company needed to reinvest the money back into the company, they dividend was lowered. When the company had plenty of extra cash lying around, the dividend payout Increased. Hovels has been paying a dividend nice Its Minimal PIP, but those dividends vary from year to year. En could argue that the dividend is guaranteed each year based on history, but the investor does not have a clue as to how what that dividend will be based off. Moreover, if you take a look at the stock price from year to year, it widely fluctuate up and down. Investors in this do not know from year to year if the company’s patents are going to strike it rich or If they are Just going to be shelved. It being an R company, It Is a risky company, which Investors know prior to taking the plunge with Investing their hard earned none.
Haversack’s business is based on the unknown of whether the patents will be useful to electronics companies. The company may come up with something that it deems the next big thing, but it may not find a company that wants to use it. Investors in Hovels are not in it specifically for the dividends. Investors are hoping for heavy payouts if Hovels makes it big. The company needs to do more research and look Into which dividend policies are working for the other small R&D companies able to make a more intelligent business decision about which dividend policy it should choose.