Clientele Effect: SBH Enterprises' Dividend Announcement and Potential Shareholder Reaction

SBH Enterprises, a company with over 100 years of operation, has historically never paid a dividend, instead focusing on reinvesting earnings in profitable growth projects. This year, they announced the start of an annual dividend for ordinary shares. Which of the following statements is most accurate about the Clientele Effect in this situation?

a. The current shareholders, having never received a dividend, will be thrilled about the distribution of net income as cash dividends. b. The current clientele, primarily drawn to the company due to its non-dividend paying policy, might feel estranged by the new policy, leading some to sell their shares. c. The dividend announcement sends a positive signal, suggesting the management is confident in their ability to maintain earnings growth and therefore sustain dividend payouts in the future. d. The market will respond negatively as the shift in dividend policy could indicate that the company has exhausted profitable growth opportunities. e. None of the above.

Correct Answer: 'b. The current clientele, mostly attracted to the company by their non-dividend paying policy, might feel alienated by the new policy and some might choose to sell their shares.'