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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
A dividend policy based on
paying a low regular dividend,
supplemented by an additional
dividend when earnings are
higher than normal in a given
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
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