Dana and David, two young financial analysts, were reviewing financial statements for Smart Phone Limited (SPL), a manufacturer of wireless mobile communication devices. Dana 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 SPL is one of the best performing companies. If it’s so good, I wonder why it isn’t paying any dividends.” David wasn’t convinced that Dana was looking in the right place for dividends but didn’t say anything.
Dana continued the discussion and noted, “Sales are up by nearly 50 percent over the previous two years. While net earnings are up over $ 600 million compared to last year, cash flow from operating activities increased by nearly $ 1,500 million compared to the previous year.” At that point, David noted that the statement of cash flows reported that the company had repurchased nearly $ 800 million in common shares. He commented, “No wonder it can’t pay dividends. With cash flows being used to repurchase shares, the board is probably reluctant to oblige itself to dividends.”
Required:
1. Correct any misstatements that either Dana or David made. Explain.
2. Which of the factors presented in the case help you understand the company’s dividend policy?