Avon's Dividend Policy

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TABLE OF CONTENTSINTRODUCTION3PERFORMANCE OF AVON'S STOCK FROM 1978-19883EVALUATION OF AVON' S FINANCIAL CONDITION IN MID-19885PURPOSE OF THE EXCHANGE OFFER6EVALUATION OF THE TRADE-OFF7REFERENCES10INTRODUCTIONA firm's decisions about dividends are often mixed up with other financing and investment decisions. Some firms pay low dividends because management is optimistic about the firm's future and wishes to retain earnings for expansion. Other firms might finance capital expenditures largely by borrowing. All the above are examples of dividend policies which can be defined more precisely as the trade-off between retaining earnings on the one hand and paying out cash and issuing new shares on the other. In order to understand the dividend…show more content…
The decision of the company to finance its acquisitions with debt, starting from 1982, resulted to high interest expense payments every year (Exhibit 1). These high interest expense payments, combined with the decreasing net earnings made it very difficult for Avon to meet successfully its generous dividend payment policy. So the company had to reduce its yearly dividend payments starting from 1982 and onwards. Under its financial condition in 1988 Avon has no other choice but to go for further reductions in dividends. That way the company will be able to meet its heavy debt obligations and at the same time finance the "come back" to its core beauty products business. PURPOSE OF THE EXCHANGE OFFERThe purpose of the exchange offer was to avoid having a dividend reduction drive down the stock price and find the "golden mean" between its own interests and the interests of its 25 large Institutional shareholders. Those shareholders owned 46.5 % of total Avon's outstanding shares (Exhibit 5) and expected high dividends from them. Some investors, as it is mentioned in the case, have stated that they held Avon stock because it paid high dividends. Hence, a reduction of dividends would

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