Question

The director of the following company has approached you with their concern for the current business scenario and future prospects.

Nestle Products Limited is an established company in the field of dairy products, chocolates and ice-creams. It has a decent track record of dividend, which average @ 40% p.a. The company has also a good record of bonus issue. The last bonus issue was made in September 2018. The company feels that due to the conspiracy hatched by its competition with the help of widespread network of distributors, the company’s product were shown to have been contaminated and it was also widely shown on the media that under the wrappers of many of their chocolates and ice-cream, there was a layer of fungus and decayed dry fruits. The snaps and live interview of the consumers complaining about the inferior quality and “totally unsafe for human consumption” shouts, drastically brought down the sale in the last quarter of the financial year 2018-2019. The directors immediately undertook damage controlling steps and through wide scale advertisement campaign tried to restore the public confidence. However, the current year’s performance is very much lower than the earlier years and any prudent financial consultant would not recommend dividend more than 20% this year. The directors are of the opinion that the sale would again pick-up from the 2nd quarter of the next year and then will be normal thereafter.

Give your guidance in above case, with special reference to the issues related to dividend/bonus policy and future share price behavior on the stock exchange.

Answer 1

KINDLY LET ME KNOW YOUR RESPONSE THROUGH YOUR RATINGS AND ALSO LET ME KNOW IF YOU WANT LENGTH OF ANSWER TO BE MORE.

In our current scenario , company Nestle Products Ltd. has incurred LOSS OF REPUTATION.

Earlier it was providing Dividend averagely of 40% along with good bonus issues. However with the raised complaints by its consumers regarding quality of its products , the sale of company drastically went down in last quarter of financial year 2018-19. Though Directors immediately undertook damage controlling steps and tried to restore the public confidence but currently it has lead to drastic downfall of Share prices. Now we are asked to provide guidance on the current situation with special reference to issues related to Dividends/Bonus policy.

So let us first understand

How to overcome/fix reputation by the company?

What is dividend ?

Under what conditions a company can provide dividend/bonus to its shareholders?

HOW TO FIX A BAD REPUTATION

1) Start by searching for your business on major search engines like Google and Bing to identify any negative press that it may be getting.

2) Own the mistake whether it is your fault or not. Be quick to apologize to your customers. Remember that a happy customer tells five fans, and an unhappy customer tells 10. A fan who has issues resolved tells 20. This is a great way to build super fans.

3) Try and rank positive messages about your company on page one of Google, pushing other negative reviews away from page one. You can hire professionals on many freelancer websites like Fiver to help with it. One can also do this by establishing all of one's social profiles on Facebook, Twitter, LinkedIn, Pinterest and Instagram as they do have ranking power to help push the negative comments further from page 1. Also, publish great content. You could source freelancers on Fiver to help with writing if you can't write well. All of these should help rank your important pages.

4) Reach out to happy customers, influencers, suppliers, and even the local news to generate some positive press for Google to show. You may also consider some great press releases.

5) Use the same medium(s) that was used to tarnish your reputation to explain the issue. Again, admit your mistake and state the steps taken to address it. Be sure not to pass blame to the customer. Louis Camassa used the same technique to reply a bad reviewer, stating that they 'had no record of the reviewer, and secondly, admitting that they made mistakes but learned and changed for the better.'

6) Invest in fresh talents through a reputable company: You may want to invest in talents that are current with what is applicable, functional and effective in the sector. And that is what Louis Camassa did. They brought in a technical sales person, into each meeting, to clarify expectations from the start.

7) Reorganize the business from the perspective of the customer. Put yourself in customer shoes and think about how the customers would react if a certain action was taken. This approach has been known to lessen customer service costs, empower employees and most importantly, restores public reputation.

8) Ask the existing customers what the would like to see improved upon and do it. This what Linda Wilson did: She changed the perception of her business by the consistently great service that she provided. This implied that her business is here to serve, and as such, positive words began spreading and gradually more locals began visiting her store.

9) Reward existing and loyal customers. Philanthropy and public giving could go a long way toward fixing a bad reputation as it could make both the new and old customers see you in a more trustworthy and positive light. Also, learn to reimburse for any bad service or product with no questions asked.

10) Learn from your mistakes and solve as many problems as you can that relates to the cause of the bad reputation. If not, it could seriously damage your potential for acquiring new customers. Use any criticism or feedback to build a better and more effective structured service and customer acquisition mousetrap.

11) Be consistent and patient as building a good reputation does not happen overnight, and repairing a bad one takes longer.

However the current situation shows a downfall and thus the measures which company should take regarding its Dividends and Bonus issues are :

WHAT IS DIVIDEND?

A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business (called retained earnings). The current year profit as well as the retained earnings of previous years are available for distribution; a corporation usually is prohibited from paying a dividend out of its capital. Distribution to shareholders may be in cash (usually a deposit into a bank account) or, if the corporation has a dividend reinvestment plan, the amount can be paid by the issue of further shares or by share repurchase. In some cases, the distribution may be of assets.

A dividend is allocated as a fixed amount per share with shareholders receiving a dividend in proportion to their shareholding. Dividends can provide stable income and raise morale among shareholders.

A company’s dividend is decided by its board of directors and it requires the shareholders’ approval. However, it is not obligatory for a company to pay dividend. When firms face cash shortage or when it needs cash for reinvestments, it can also skip paying dividends.

In the US, some of the companies like Sun Microsystems, Cisco and Oracle do not pay dividends and reinvest their total profit in the business itself. Dividend payment usually does not affect the fundamental value of a company’s share price.

However a company may decide on its Dividend Payout policy for future. Some of them are :

Regular Dividend

Stable Dividend

Irregular Dividend

No Dividend

The dividends and dividend policy of a company are important factors that many investors consider when deciding what stocks to invest in. Dividends can help investors earn a high return on their investment, and a company’s dividend payment policy is a reflection of its financial performance.

Considering the Current Scenario it would be advisable that company follows :

NO DIVIDEND POLICY

Under the no dividend policy, the company doesn’t distribute dividends to shareholders. It is because any profits earned is retained and reinvested into the business for future growth. Companies that don’t give out dividends are constantly growing and expanding, and shareholders invest in them because the value of the company stock appreciates. For the investor, the share price appreciation is more valuable than a dividend payout.

What Happens When a Company Cuts Its Dividends?

WITH RESPECT TO COMPANY :  

A dividend cut affects a company's cash outflows. The accounting for a dividend payment involves reducing the cash and retained earnings amounts on the balance sheet. A company's retained earnings account accumulates net income minus dividend payments. Therefore, a dividend cut increases both the retained earnings and cash account balances. The cash flow from financing activities, which is part of the statement of cash flows, increases because of the reduction in dividends, which improves net cash flow. For example, if a company has 1 million common shares outstanding and it cuts its dividends from $2 to $1 a share, the cash savings are $1 a share, or $1 million in total. Therefore, the cash, retained earnings and net cash flow amounts increase by $1 million each.

WITH RESPECT TO INVESTOR :

Investors usually buy shares in dividend-paying companies for the regular dividend payments. Retirees and others on fixed income may have several dividend-paying stocks in their portfolios because they rely on the quarterly cash distributions to make a living. A cut or halt in dividend payments affects the cash inflows of these investors.

WITH RESPECT TO STOCK PRICE :

A dividend cut could affect the stock price negatively, which affects both the company and its shareholders. Markets react negatively to a company's dividend cut announcement because investors and analysts fear the worst, especially if the company's industry peers are maintaining their quarterly dividend payments. Investors assume that a company is reducing dividends because it is having cash flow problems. This could be the result of deteriorating business conditions, such as declining sales, rising expenses and falling profits. Investors would sell this company's shares, which could cause a fall in the share price. The company may have difficulty raising additional funds because investors and lenders tend to shy away from companies in financial trouble.

CONSIDERATIONS :

Companies can adopt certain measures to mitigate the impact of a dividend cut, starting with full disclosure. Management should explain why it is cutting or halting dividend payments and whether or when it expects to resume regular payments. For example, management could say that the company plans to invest the cash savings in new product development or in acquisitions that would generate better long-term shareholder returns. Investors should evaluate the reasons for the dividend cut before deciding whether to sell the stock and invest the funds elsewhere.

Same is applicable for BONUS ISSUES as Bonus are given out of profit so it is advisable to retain earnings thereby increasing Share price of the stock.

Now if we discuss about Future Share Price behaviour on the stock exchange , it can be :

Defined as the market in which equity shares of publicly-traded businesses are bought and sold, the stock market measures the aggregate value of all publicly-traded companies.

The stock market's movements can impact companies in a variety of ways. The rise and fall of share price values affects a company’s market capitalization and therefore its market value. The higher shares are priced the more a company is worth in market value and vice versa. The market value of a company can be important when considering mergers and/or acquisitions that involve shares as part of the deal.

Share issuance decisions can also be affected by stock performance. If a stock is doing well, a company might be more inclined to issue more shares because they believe they can raise more capital at the higher value.

Stock market performance also affects a company’s cost of capital. Company’s must average the costs of both their debt and equity capital when arriving at a weighted average cost of capital which is used for many analysis scenarios. The higher the expected market performance, the higher the cost of equity capital will be. As cost of equity capital rises into the future, present value calculations become lower because companies must use a higher discounting rate.

Companies may also have substantial capital investments in their stock which can lead to problems if the stock falls. For example, companies may hold shares as cash equivalents or use shares as backing for pension funds. In any case, when shares fall, the value decreases which can lead to funding problems.

Lastly, positive increases in stock values can also potentially generate new interests for a particular company or sector. This can possibly add to revenue growth from sales or attract investors.

Directors are of the opinion that from 2nd Quarter of the next year sales would pick up and situation will get back to normal so if company after taking all such controlling measures enhances its stock prices and profits then it can follow its previous Dividend Payout policies and Bonus payments.  

THANKYOU .