00 3850 1997 600 100 3800 1996 300 100 3600 1995 075

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Unformatted text preview: ces for the past 12 years follow. Year Earnings/share Dividends/share Average price/share 2003 $4.50 $1.50 $47.50 2002 3.90 1.50 46.50 2001 4.60 1.50 45.00 2000 4.20 1.00 43.00 1999 5.00 1.00 42.00 1998 2.00 1.00 38.50 1997 6.00 1.00 38.00 1996 3.00 1.00 36.00 1995 0.75 1.00 33.00 1994 0.50 1.00 33.00 1993 2.70 1.00 33.50 1992 2.85 1.00 35.00 Whatever the level of earnings, Woodward Laboratories paid dividends of $1.00 per share through 2000. In 2001, the dividend increased to $1.50 per share because earnings in excess of $4.00 per share had been achieved for 3 years. In 2001, the firm also had to establish a new earnings plateau for further dividend increases. Woodward Laboratories’ average price per share exhibited a stable, increasing behavior in spite of a somewhat volatile pattern of earnings. target dividend-payout ratio A dividend policy under which the firm attempts to pay out a certain percentage of earnings as a stated dollar dividend and adjusts that dividend toward a target payout as proven earnings increases occur. Often a regular dividend policy is built around a target dividend-payout ratio. Under this policy, the firm attempts to pay out a certain percentage of earnings, but rather than let dividends fluctuate, it pays a stated dollar dividend and adjusts that dividend toward the target payout as proven earnings increases occur. For instance, Woodward Laboratories appears to have a target payout ratio of around 35 percent. The payout was about 35 percent ($1.00 $2.85) 572 PART 4 Long-Term Financial Decisions when the dividend policy was set in 1992, and when the dividend was raised to $1.50 in 2001, the payout ratio was about 33 percent ($1.50 $4.60). Low-Regular-and-Extra Dividend Policy low-regular-and-extra dividend policy A dividend policy based on paying a low regular dividend, supplemented by an additional dividend when earnings are higher than normal in a given period. extra dividend An additional dividend optionally paid by the firm if earnings are higher than normal in a given period. Some firms establish a low-regular-and-extra dividend policy, paying a low regular dividend, supplemented by an additional dividend when earnings are higher than normal in a given period. By calling the additional dividend an extra dividend, the firm avoids giving shareholders false hopes. This policy is especially common among companies that experience cyclical shifts in earnings. By establishing a low regular dividend that is paid each period, the firm gives investors the stable income necessary to build confidence in the firm, and the extra dividend permits them to share in the earnings from an especially good period. Firms using this policy must raise the level of the regular dividend once proven increases in earnings have been achieved. The extra dividend should not be a regular event; otherwise, it becomes meaningless. The use of a target dividend-payout ratio in establishing the regular dividend level is advisable. Review Question 1...
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