Peterborough Printers specializes in high-volume reproduction of advertising leaflets, such as those distributed by direct mail or inserted in newspapers. Located in Scarborough and founded by Peter Pang over 40 years ago, the company has been publicly traded for the past 20 years. Through its history, the company has successfully attracted and retained a solid and stable base of business clients largely as a result of Peter’s savvy salesmanship.
Peterborough has two classes of shares, common and preferred. The common shares are listed on the Toronto Stock Exchange, and Peter still holds 20% of these shares. The preferred shares are privately held by five individuals and pay cumulative dividends.
You are the CFO of Peterborough Printers. You recently met with Peter to discuss financial matters. The following is an excerpt from that conversation:
Peter: This recession is a lot deeper and lasting a lot longer than I and many others had anticipated. Our sales are way down and I’m becoming more and more worried.
You: There’s no doubt about it. We’ll need to be on our toes to come out of this in one piece.
Peter: On top of the recession, there has been a gradual but noticeable drop in our printing volume over the past decade.
You: I think it has a lot to do with companies relying less on print media and switching to online advertising.
Peter: That’s probably right. I’m working on adjusting our production capabilities in light of this long-term trend.
You: That’s good to hear.
Peter: So, the reason we’re meeting today is to see what we might do on the financial side of things to help us cope with the current economic pressures. In hindsight, we have been very fortunate, having built up a substantial cushion of cash and short-term investments during the good years. We are still in good shape now, but I expect another one or two lean years will take us to the breaking point.
As you know, Peterborough has been able to consistently maintain and increase dividends to our common shareholders over the past 20 years. Under the circumstances, we need to seriously think about whether we can continue with this policy. I wonder if there is anything we can do to maintain our financial health while not disappointing our shareholders. I’ve heard that some companies pay stock dividends. I’m not exactly sure how they work, but I’ve been told that paying these dividends doesn’t cost us any cash.
You: What are your thoughts on the dividends on the preferred shares?
Peter: I’m not as concerned about maintaining those dividends. As it is, the dividends are cumulative, so these shareholders will get their money sooner or later, even if we have to miss paying them this year or next year.
You: Well, let me think about these dividend issues and get back to you tomorrow.

Required:

Draft a short report discussing the dividend policy alternatives and your recommendations.