Mature before its years?

Dividends are usually associated with ``mature'' companies, whatever that means. What does ``mature'' mean anyway, and what might constitute maturity for a New Technological Corporation?

Most companies pass through a struggling start-up phase, a period of rapid growth, and an extended maturity characterised by relatively stable sales and earnings. This life cycle usually follows the development of the industry in which the company operates: from not being recognised at all, through exponential growth in a market with unknown total size, to saturation and growth thereafter at rates limited by the overall growth of the market (usually constrained by demographic or economic factors) and the company's share of that market, won or lost at the expense of its competitors. Earnings performance also evolves through these phases: during start-up the company loses money, its losses funded by the original investors. If it succeeds and begins to grow rapidly, it becomes profitable but reinvests all of its earnings in the business to fund its rapid growth and not forfeit portions of the market to competitors who are also growing rapidly. In the third phase the company cannot grow measurably faster by reinvesting its earnings, so it often chooses to pay dividends to its shareholders.

A New Technological Corporation can be expected to follow this pattern of development, but the presence of technological leverage results in a very different earnings profile as it moves from stage to stage. After surviving the start-up phase, a New Technological Corporation begins to generate earnings at a very high rate of return. Because little capital investment is needed during its period of rapid growth, there is little need to reinvest earnings and they are simply retained. After the company's product reaches market saturation, earnings may actually decline as the percentage of sales the company devotes to sales and marketing increases to maintain and expand its market share.

Autodesk's start-up phase ran from April of 1982 through January of 1983, when positive cash flow was achieved. Autodesk is still in the rapid growth phase and, characteristic of that phase, cannot predict when saturation will occur. If AutoCAD reaches saturation and Autodesk does not by that time have another product in the rapid growth phase, Autodesk's revenues will thereafter grow at about the rate of the CAD industry as a whole, between 20% and 35% per year.

Since New Technological Corporations generate earnings during their rapid growth phase which equal or exceed those of mature conventional companies and have little need to reinvest them, one might say that a New Technological Corporation matures early. Its financial maturity is perhaps defined best by having retained all the working capital it needs as an adversity hedge rather than by having saturated its market. This early maturity may justify payment of dividends earlier in the company's life cycle than would be appropriate for conventional companies.