The Financial Reporting Council (FRC) has published a report detailing how dividend disclosures can be fundamental to showcasing an investment opportunity as well as demonstrating board stewardship.
'Companies, investors and the FRC consider that disclosure of dividend policy and resources, including distributable profits, may be helpful. In addition to demonstrating the board’s stewardship of the company, they provide key information used by investors in evaluating the extent to which returns may be provided in the form of dividends in future. (Investors) told us that they recognise that the unexpected can and does happen and by providing disclosures, companies are not painting themselves into a corner.'
Melanie McLaren, Executive Director or Codes and Standards
What information do investors of listed companies want?
Disclosure of the company’s dividend policy
To promote an understanding of their stewardship, including how capital is maintained, the boards of companies should:
- disclose what their policy is (including a policy not to pay dividends);
- disclose what they considered, the process undertaken including the governance process and the rationale applied for establishing the policy;
- disclose how they plan to implement the policy and the time frame over which the policy is expected to operate;
- demonstrate how the policy links to the board’s strategy, business model and capital strategy; and
- set out the risks, constraints and judgements associated with the policy.
There are generally two types of policy – progressive or payout ratio. Elements of good policy disclosure include:
- Progressive: clarity on the level and period of progression i.e. whether the policy is to maintain the dividend or a minimum amount, a range, target or specific level of increase, and how the level is measured e.g. by reference to a currency or inflation index.
- Payout ratio: the basis of the ratio and the rationale for it should be clear, e.g. whether it is based on an earnings/cash flow/other measure, with an explanation of how this is arrived at if it is an ‘adjusted’ rather than GAAP measure, and whether a minimum, average, target, specific ratio or range is to be adopted.
Keeping it all together
Disclosures that compare the actual dividends declared to the company’s dividend policy can be improved by disclosing:
- the the judgements and constraints considered in applying the policy (including distributable profits and cash availability); and
- changes to the policy or departures therefrom.
In addition, the dispersal of disclosures across annual reports and other communications results in repetition, and makes it hard for investors to find the information they need. Companies should group together similar or related disclosures on dividends, or draw links between the disclosure elements.
Special dividends and share buybacks
Investors indicated they would like similar information regarding policy and practice in relation to other distributions, such as special dividends and share buybacks, as well as the circumstances in which these may arise and whether they are in the best interests of shareholders.
In particular with regards to share buybacks:
- maximum price the company is prepared to pay;
- target minimum rate of return;
- weighted average cost of the shares bought;
- total cost;
- effect on key metrics; and
- benefits for shareholders.
Although not required by the Companies Act 2006, the disclosure of dividend resources, i.e. cash and the amount of the company’s reserves legally available for distribution under company law (distributable profits), is helpful in circumstances where the ability of the company to pay dividends is, or might be, insufficient relative to the level of dividends indicated by the policy.
For more information and assistance please speak to your usual RSM contact.