Osborn Corporation has paid 60 consecutive quarterly cash dividends (15 years).

Question

Osborn Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last six months have been a real cash drain on the company; its profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient to meet only day-to-day operating needs, the president, Barry Sigle, has decided that a stock dividend instead of a cash dividend should be declared. He tells Osborn’s financial vice president, Mandy Drummond, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a five percent stock dividend. “Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend,” he orders. “Just watch our stock rise when we announce the stock dividend; it must be a good thing if that happens.”

Who are the stakeholders in this situation?

Is there anything unethical about president Sigle’s intentions or actions?

What is the effect of a stock dividend on a corporation’s stockholders’ equity accounts? Which would you rather receive as a stockholder—a cash dividend or a stock dividend? Why?

Explanation / Answer

The stakeholders in this situation would be the stockholders, the President and the Vice President, in my opinion.

In a way Henson may or may not be acting unethical. He is worried about keeping his company afloat and trying to keep the stockholders happy as well. On the other hand, he is trying to pull the wool over the stockholder’s eyes and convince them that the stock dividends are as good as cash dividends.

“A stock dividend does not decrease total stockholders’ equity or total assets.” (p612) So, in this case I would say that it would not affect the stockholders’ equity account. The number of stocks that a stockholder owns will increase, but their percentage of the company will remain the same.

I think that I would rather have the cash dividends than the stock dividends. Even though I would have to pay tax I would still be getting cash on a regular basis (quarterly in this case) from the company. To me this is better to have money in my pocket than to have more stocks. Also, if I were to pick stock dividend the price per share would drop every time I earned a dividend, along with not increasing the company’s value. This is why I think I would prefer cash dividends.

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