Question

A company in Italy is a leading fabricator of precious metal alloy components for the leather industry, pays out only 23 percent of its earnings as dividends. The average dividend payout ratio for metal fabricating firms is 45 percent. The average growth rate in earnings for the entire sector is 10 percent (the company is expected to grow 23 percent). Should the company pay more in dividends just to get closer to the average payout ratio? Why or why not?

Answer 1

No, this is because they aren't paying higher dividends because they are looking to expand more in the future. If they payout the dividends, they wouldn't have capital to exapand and grow further. This is also evident from the growth rates given where the industry is only growing at a 10% rate but the company is growing at a 23% rate. If the firm starts giving dividend according to the industry standards, their 23% growth rate figure would come down. The investors can't benefit because of dividends here but they will be able to benfit by the increase in firm value in the near future.