Gainesboro Machine Tools Corporation
In mid-September 2005, Ashley Swenson, chief financial officer (CFO) of Gainesboro Machine Tools Corporation, paced the floor of her Minnesota office. She needed to submit a recommendation to Gainesboro is board of directors regarding the company is dividend policy, which had been the subject of an ongoing debate among the firm is senior managers. Compounding her problem was the uncertainty surrounding the recent impact of Hurricane Katrina , which had caused untold destruction across the southeastern United States. In the weeks after the storm ,
The stock market had spiraled downward and , along with it, Gainesboro is stock, which had fallen 18%, to $22.15 . In response to the market shock , a spate of companies had announced plans to buy back stock. While some were motivated by a desire to signal confidence in their companies as well as in the u.s. financial markets, still oters had opportunistic reasons. Now, Ashley Swenson is dividend-decision problem was compounded by the dilemma of whether to use company funds to pay shareholder dividends or to buy back stock.
Background on the Dividend Question
After years of traditionally strong earnings and predictable dividend growth ,Gainesboro had faltered in the past five years. In response, management implemented two extensive restructuring programs, both of which were accompanied by net losses. For three years in a row since 2000, dividends had exceeded earnings. Then, in 2003, dividends were decreased to a level below earnings. Despite extraordinary losses in 2004, the board of directors declared a small dividend. For the first two quarters of 2005, the board declared no dividend. But in a special letter to shareholders, the board committed itself to resuming payment of the dividend as soon as possible – ideally, sometime in 2005.
This case was written by Robert F. Bruner and Sean Carr, and is dedicated to Professors Robert F. Vandell and Pearson Hunt, the authors of an antecedent case, long out of print, that provided the model for the economic problem in this case. “ Gainesboro” is a fictional firm, though it draws on dilemmas of contemporary companies. The financial support of the Batten Institute is gratefully acknowledged. Copyright 2005 by the university of Virginia Darden School Foundation, Charlottesville , VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com . No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying , recording , or otherwise – without the permission of the Darden school Foundation.
In a related matter, senior management considered emba rking on a campaign of corporate-image advertising, together with changing the name of the corporation to “ Gainesboro Advanced Systems International, Inc.” Management believed that the name change would help improve the investment community is perception of the company.
Overall, management is view was that Gainesboro was a resurgent company that demonstrated great potential for growth and profitability. The restructurings had revitalized the company is operating divisions. In addition, the newly developed machine tools designed on state –of-the –art computers showed signs of being well received in the market, and promised to render the competitors is products obsolete. Many within the company viewed 2005 as the dawning of a new era, which, in spite of the company is recent performance, would turn Gainesboro into a growth stock. The company had no Moody is or Standard & Poor is rating because it had no bonds outstanding, but Value Line rated it “A” company.
Out of this combination of a troubled past and a bright future arose Swenson is dilemma.
Did the market view Gainesbor as a company on wane, a blue-chipstock, or a potential growth stock?
How, if at all, Could Gainesboro affect that perception? Would a change of name help to positively frame investors views of the firm? Did the company is investors expect capital growth or steady dividends? Would a stock buyback instead of a dividend affect investors perceptions of Gainesboro in any way? And, if those questions could be answered, what were the implications for Gainesboro is future dividend policy?
The company
Gainesboro Corporation was founded in 1923 in Concord, New Hampshire, by two mechanical engineers, James Gaines and David Scarboro. The two men had gone to school together and were disenchanted with their prospects as mechanics at a farm-equipment manufacturer.
In its early years, Gainesboro had designed and manufactured a number of machinery parts, including metal presses, dies, and molds. In the 1940s, the company is large manufacturing plant produced armored-vehicle and tank parts and miscellaneous equipment for the war effort, including riveters and welders. After the war, the company concentrated on the production of industrial presses and molds, for plastics as well as metals. By 1975, the company had developed a reputation as an innovative producer of industrial machinery and machine tools.
In the early 1980s, Gainesboro entered the new field of computer-aided design and computer-aided manufacturing(CAD/CAM). Working with a small software company, it devcloped a line of presses that could manufacture metal parts by responding to computer commands. Gainesboro merged the software company into its operations and, over the next several years, perfected the CAM equipment. At the same time, it developed a superior line of CAD software and equipment that would allow an engineer to design a part to exacting specifications on a computer. The design could then be entered into the company is CAM equipment, and the parts could be manufactured without the use of blueprints or human interference.