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Progressive Corporation Case Solution & Answer

 

  1. An instance of cut dividend to fund investment

A dividend cut befalls when a company on certain grounds reduces the amount of dividend or simply stops paying it. A dividend cut gives a strong negative signal to the market participants that either the company is not financially stable to pay the dividends which it was paying in past or is in a difficulty to nourish its chosen investment and needs money through cutting the divided which would otherwise have been paid.

Prudential Insurer which is one of the largest and eldest insurance provider in UK has cut its dividend in 2003 and at that time it was expected to be splashed from 26p last year to 16 p giving a fall of 40%.

This dividend cut was warned 5 months ago and it saved company’s GBP200 million. Before the dividend cut, the company dropped 27% of its operating profit. The last time when Prudential cut its dividend was 1914 and the CEO said that it was the right thing to do for the business.

In March 2003, Britannic and Royal and Sun Alliances also announced dividend cut. Large number of companies belong to different industries, decided to cut down the dividend in recent succession in 2008 and 2009. (Jones, 2003)

Dividend cut decision is impactful for market and competitor because it gives negative signal to the market and the cash outflows of the company. Investors usually buy shares of dividend-paying companies and a cut in it affects the investor’s cash inflows.

Companies can embrace certain methods to diminish the effects of dividend cut, starting with prior disclosures. Management should explain the grounds of decision for example to invest in new projects and developments that would yield long-term shareholder profits. (Langager)

 

  1. Instance of spin-off in insurance group:

Spin-off is the formation of a new and liberated company by the sale of new stock of a standing business or division of a parent company. It is a sort of divestiture.

In 2002,Citigroup decided to spin-off the traveler’s insurance by dispensing 219 million shares of Travelers class A common stock. As a result, Citigroup grips 49.95 millions of shares of Travelers class A common stock. Travelers is the 3rd largest commercial lines insurer providing a wide collection of insurance products.

  1. Dividend paying firms

In the insurance sector, Zurich Insurance Group is the top dividend paying company which is 5.81% of its income. Zurich operates in Switzerland and in the top 10 dividend payers worldwide list stands at No.02. For the last 6-7 years it has maintained its dividend at CHF 17.00 per share and intends a target payout ratio of 75% of its net income attributable to stockholders whereas in 2005 the same figure was CHF 4.60 which shows the remarkable growth that Zurich has achieved.

In the food and beverages industry, Nestle being the largest one also stands at top of the list in dividend payers of world. This Swiss Cross National Company is paying 5.81% of its income as dividend to its equity providers……….

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