Dividend on earnings growth

CFA Level II Corporate Finance
#1

Hi! I have the following question:

Proposal 4: “Initiate a regular cash dividend.”

Q: The implementation of proposal 4 would most likely signal to Investors that future earnings can be expected to:
a) decrease
b) remain unchanged
c) increase

The answer is C. I can see their intuition, but surely a company would start to issue a dividend if they expect that their future growth is limited? From level one, if G = RR * ROE, would it not make g smaller by issuing a dividend?

Thanks!

#2

Well initiating a regular cash dividend kind of assures investors that going forth the firm will be generating good profitability. The management is confident of this and hence risks paying out dividends. The key here is that management has its capital well invested and believes that invested capital is yet to pay off handsomely and hence pays out dividends rather retaining them to reinvest back into business, to maintain investor confidence.