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Progressive Dividend

In: Business and Management

Submitted By Trainlax1
Words 1289
Pages 6
There are three key factors that effect how Progressive’s proposed dividend policy will impact the company. First, dividend payout should reflect management’s decision to reinvest in projects that can provide a higher rate of return than shareholders would receive in the market. Second, the industry and market standard for dividend payout is widely held as slow steady growth. Failure to adhere to this norm can create adverse effects to the market value of the security. Third, the variable policy that Progressive is introducing is calculated in a way that does not consider the company’s true performance. By focusing on these three factors I believe that even though the new policy will initially increase shareholder dividends, it does not benefit the company overall.

Companies don’t have many choices when it comes to their earnings; they either reinvest them in the company, pay out dividends to shareholders, or some combination of both. A company is free to choose how they will distribute their earnings but it is important to remember that a fundamental of dividend policy is determining plow back and payout ratios based on the ability to invest in projects that generate a return on investment greater than the required rate of return. Progressive’s proposed policy does not consider reinvestment policy at all; instead it simply uses an arbitrary formula that only looks at the company’s recent performance.

Failure to set payout ratio based on reinvestment projects can leave money on the table for investors and subject the company to miss out on growth opportunities. While an insurance company may not have as many opportunities to invest in projects with substantial returns as those in other industries like technology do projects come along and it is important for the company to have the flexibility to invest when an opportunity exists. The target percentage is set

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