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Napco

CASE 2 – NAPCO Industries Incorporated

BACKGROUND
Napco Industries Incorporated had a declared objective of realizing a 10% return on beginning shareholder’s equity.   The CEO, Gary Rappaport, believed that the company should give dividends when it could.   In 1975, it seemed that the company would be able to reach this goal.   Since there was an excess of cash, the question of whether the company should give a payout and if yes, in what form and how much it should give, then became a topic for discussion.   Will giving the payout increase the firm’s value as opposed to retaining the earnings?   What decision is the best for Napco?  

DECISION
Napco should give a dividend payout of 15%.
The decision to give a dividend payout is critical to the future operations of Napco.   This is because when it comes to dividend payments, investors love rules of thumb, and one that applies to the dividend universe is that the higher the yield, the greater the risk of the dividend being cut or even wiped out.   In this regard, should Napco decide to pay dividends, it will be best to start at a comfortable and conservative level to have room in the future for smoothing as required.

AREAS CONSIDERED
In coming up with the decision regarding the payout of dividends to Napco’s shareholders, the following qualitative and quantitative factors were considered.

A.   Qualitative factors
1. Maturity level of the company
Napco may be considered a growth company.   Generally, growth companies put off giving dividends because they utilize earnings to fuel further growth.   Growth companies are not sure of their future income so the sustainability of giving dividends is in question.
Napco had been experiencing positive net earnings as well as rapid earnings growth only since 1970.   This is due to the change in management philosophy from taking one-time large contracts to creating long term relationships with customers.   The new management philosophy is conducive to long-term growth and...