According to the article in Forbes magazine entitled "A Progressive dividend policy," the final outcome for Progressive shareholders is likely to be an increase in profits during most ordinary, reasonably profitable years, although now dividends will be paid annually rather than quarterly (Carlson 2006, p.1). (This may also be seen as a negative by investors, who might want to pocket the dividends as soon as possible to reinvest and therefore make more money and capitalize upon their income in other ways).
What would change if Progressive Corporation used another dividend policy?
According to longtime investment analyst Charles Carlson (2006), dividend payments can take a variety of forms -- from increasing to omitting payments altogether, to paying special dividends during historic changes, to radically varying the schedule of payment. But the Progressive Corporation's strategy is seen as highly unique. A company's usual mode of dividend payment is to do so regularly, and shareholders can count upon the dividend.
Before, Progressive employed such a strategy. But now, it is leaving the regularity of its payments in doubt with the hope of investors gaining more. Carlson predicts that investors will be less-than-enthusiastic about such a method of reimbursement, pointing out that above all else, most average investors like predictability. On one hand, such a dividend policy allows for great rewards, but it also creates the conditions for great uncertainty. And it might be observed that an investor in a fairly 'blue chip' company like Progressive might prefer a more certain dividend payment.
Traditional dividend payment methods include residual, stability, and hybrid models. Residual policies mean that companies use internal equity to finance operating expenses and new ventures, and the dividend payments come out of what is left over. A stable debt-equity ratio is maintained (How and why do companies pay dividends,...
Residual dividend payments still fluctuate, although not as much as Progressive's current, unique policy. More conservative investors are likely to favor companies that make use of a stability policy, where dividends are paid at a fixed fraction of quarterly earnings or paid in quarterly portions of yearly earnings (How and why do companies pay dividends, 2010, Investopedia).
The most common methodology of payment today is a compromise between residual and stable dividend payment methods. Instead of regularly calculating the debt/equity ratio and paying residual dividends based upon such calculations on a quarterly basis, the ratio is viewed as a long-term goal, and dividends are regularly paid to investors on a stable basis even if the company falls slightly short during the quarter. Hence the radical nature of Progressive's policy, which offers even larger potential gains but a greater risk of losses than the slightly riskier residual method (How and why do companies pay dividends, 2010, Investopedia). In today's uncertain economic climate, as more and more investors are shifting to conservative investments, few companies are likely to adopt Progressive's strategy, despite Carlson's prediction that they might in 2006. However, in the long-term future, it is possible that companies might take a more 'Progressive' strategy, to attract larger and more risk-seeking investors who desire to make a considerable profit.
References
Bowery, Angela. What is gainsharing? Retrieved October 9, 2010 at http://www.angelfire.com/mo3/acotrel/labourman/Gains.htm
Carlson, C.B. (2006). A progressive dividend policy. Forbes.com. Retrieved October 9, 2010 at http://www.forbes.com/2006/05/18/progressive-dividend-drip-in_cc_0518soapbox_inl.html
How and why do companies pay dividends? (2010). Investopedia. Retrieved October 9, 2010 at http://www.investopedia.com/articles/03/011703.asp
