Analyzing Dividend Policy
Heather and Scott, Two young financial analysts, were reviewing financial statements for Dell, one of the world’s largest manufacturers of personal computers. Scott noted that the company did not report any dividends in the financing activity section of the statement of cash flows and said, “I have heard that Dell is one of the best performing companies. If it’s so good, I wonder why it isn’t paying any dividends.” Heather wasn’t convinced that Scott was looking in the right place for dividends but didn’t say anything.
Scott continued the discussion by noting, “Sales for Dell are up nearly 35 percent over the previous two years. While net income is up over $500 million compared to last year, cash flow from operating activities declined by nearly $500 million compared to the previous year.”
At that point, Heather noted that the statement of cash flows reported that Dell had repurchased nearly $3 billion in common stock. She also was surprised to see that inventory and accounts receivable had decreased by nearly $2 billion in the previous year. “No wonder it can’t pay dividends. With cash flows declining by $500 million, the Board is probably reluctant to obligate itself to dividends.”
Required:
1. Correct any misstatements that either Heather or Scott made. Explain.
2. Which of the factors presented in the case help you understand Dell’s dividend policy?
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