Question #11
Reading: Reading 15 Analysis of Dividends and Share Repurchases
PDF File: Reading 15 Analysis of Dividends and Share Repurchases.pdf
Page: 5
Status: Unattempted
Question
Hikaru Takei is the portfolio manager for the Reliant Dividend Focused Fund. Takei wants to add a firm to his portfolio that follows a stable dividend policy. Takei is considering investing in one of three companies: Kirk Beauty Supplies maintains a constant dividend payout of 25 to 30%. Kelley Medical Devices increases its dividend each year in accordance with the company's long run growth rate of 4%. Barrett Satellite Systems has maintained a dividend of $2.00 per share over the last 6 years. Which stock best meets Takei's criteria?
Answer Choices:
A. Barrett Satellite Systems
B. Kelley Medical Devices
C. Kirk Beauty Supplies
Explanation
Due to inflation considerations, a company with a stable dividend policy will have stability
in the rate of increase for its dividend each year. This typically means aligning the
company's dividend growth rate with its long-term growth rate. Although the company
with the fixed per share dividend is a tempting choice, once inflation is considered, a fixed
$2.00 per share dividend is actually declining each year in terms of spending power.