July 5, 2023 Disclosing Dividends
“A dividend is a payment a company can make to shareholders if it has made a profit.” That’s the opening statement on dividends taken from the Government’s published advice on running a limited company. And it’s probably the way that the majority of people would view dividend payments.
But delve deeper and the profits=dividends equation becomes more complicated. As the ICAEW website warns: “The law on dividend payments by companies is complex and it is easy for directors to make mistakes.”
For a start directors need to ensure that the decision to pay dividends is properly documented and voted on in accordance with the company’s internal rules. And even before that, directors need to take account of a range of considerations including: what calculation should be used to determine the level of dividends that can be paid, do any changes to the company’s finances since the year end impact the level of dividends which should be paid, and what level of funds would it be prudent to retain in the business.
Even then, directors need to consider what message the payment of dividends is sending to investors and others. As the Financial Reporting Council (FRC) recently commented; “Institutional investors increasingly reflect both on the trade-off between dividends and other considerations, such as support for customers and employees over cost-of-living pressures and the impact of inflation on the business model of companies over the medium term.” Other stakeholders too might view the dividend calculation as an indicator of the level of directorial competence.
With this in mind, the FRC’s Financial Reporting Lab has recently issued an insight report on dividends and dividend disclosures. The report highlights the importance not only of dividend disclosures but also disclosing the rationale behind the dividend disclosure/ retained profit mix.
Interestingly, the report also comments on a general shift in the way in which dividend disclosures are viewed with investors increasingly considering the macro, market, and entity impacts of dividend policies. This leads, for example, to investors looking at whether retained earnings are to be used for the long-term benefit of the business, perhaps by boosting investments in green transitions or responding to market forces. The FRC report also suggests that reports on dividend policy could be considered alongside reports on the sources and uses of cash with dividend policy potentially impacting on cash flows in times of uncertainty.
However reported on, the key to reassuring investors is to provide context and continuity. By ensuring that changes in policy are clearly flagged, investors can have a greater degree of certainty not only on the current state of the company but also its future prospects.
