Napco Industries
In determining whether or not Napco should start declaring cash dividends, we have analyzed carefully Napcos financial statements, industry performance and company goals.
After such analysis, we have come up with the following points:
The graph on the lower left (exhibit 1) shows the trend of the average market price of Napco for the past ten years. After 1968, the companys market price continued to decline even though its EPS projected an upward trend (see exhibit 2). The main reason for this is the companys unstable earnings for the past decade (see exhibit 3). In the long run, if the EPS continues to show an upward trend through sustainability and stability of earnings, then the market price will eventually reflect this pattern.
For several years, Napco has been thought of as a “deals” company. Early this year, this management philosophy was changed and is now geared towards designing and building proprietary products to meet known demands. Internally, this approach seems to gain promising profits. However, to assess the investors confidence on the said approach would be difficult because actual returns havent materialized yet. In order to gain the trust of the investors, the company must first achieve stable earnings.
Further, this change in management philosophy would entail retaining its earnings as buffer against the uncertainties in the outcome of this management reorientation.
The companys objective of a 10% return on equity can be achieved by retaining its cash instead of paying it out as dividends. Also, it would be better to first surpass this rate before declaring dividends so as to maintain this ROE level.
As of now, Napco is liquid as evidenced by its higher current ratio compared to the industry. However, because of its instability in earnings, there is no assurance