Insight report: Disclosure of dividends revisited

Published: 29 June 2023

4 minute read

Context

Dividends and distributions have long been a key consideration for investors. However, higher interest and inflation rates have introduced a wider set of factors to consider. 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.

It is not only investors who are interested in the decision-making around dividends; it is also of interest to a wider set of stakeholders interested in the stability of a company and its future prospects. Whilst in the medium term, the government intends to introduce legislation for additional disclosure in this area (see below), there are aspects where more focused disclosure would already be useful to investors and other stakeholders.

Upcoming legislative change

Ongoing legislative developments will have implications for the depth and detail of dividend-related disclosure of in-scope companies. The Government’s Response of 31 May 2022 to its consultation on the March 2021 White Paper on ‘Restoring Trust in Audit and Corporate Governance’ confirmed proposals to introduce new reporting requirements.

The disclosures relating to the Statement on Distributions are:

Annual audited disclosure of a company’s distributable profits (that is, the company’s accumulated realised profits less its accumulated realised losses) which must be available before a dividend or other distribution is made.
A statement of the company’s forward-looking policy on the distribution of profits, including dividends and purchase of own shares.

This insight report revisits key themes from the previous report on the disclosure of dividends policy and practice. It reconsiders them with the current economic environment in mind. We have highlighted reporting tips and examples to help, however, companies should always consider their own circumstances and focus their disclosure.

A change in tone

Our previous work highlighted that better disclosure went beyond simply disclosing how much dividend was paid. For investors, the capacity and commitment of a company to sustain and grow its dividend over time is also important. In addition, where earnings are retained, an indication of how these are being used to 'grow' the company, in accordance with its business model and objectives, is also useful.

Whilst the general expectations of good disclosure remain, it should also reflect the new macroeconomic context. Even making no change to the policy is helpful to explain and contextualise.

Our review of current market practices identified three factors that are changing the context in which investors assess dividend policy:

Macro: How does the policy reflect Macro factors such as economic slowdown, inflation and interest rate environment, etc.
Market: How does the policy reflect market factors such as peer comparison, the need to respond to industry trends, etc.
Entity: How does the policy reflect company factors such as the need to invest in green transition, financing and debt repayments, staff and customer support, etc.

Examples

Macroeconomic context: National Grid plc

From 2021/2022, the company adjusted its dividend policy to grow the dividend per share at least in line with the rate of CPIH each year. The previous policy was to grow in line with the increase in average UK RPI inflation. This change was clearly communicated. The company also disclosed a clear, single number on distributable reserves, and confirmed the coverage of at least five years of dividends. The disclosures are located in the same section where the main dividend decisions are discussed, which provides a holistic view to readers.

Market context: J Sainsbury plc

The company linked its dividend decision to several factors crucial to firms operating in the sector: successful mitigation of operating cost inflation, the interests of wider stakeholders, and a strong cash flow. This discussion was further contextualised within the company's capital allocation strategy going forward.

Company context: Wincanton plc

The company linked its thinking around dividends to the strengths of its business model – established contractual structures, financial stability and cash flow generation. It also demonstrated an awareness of the trade offs involved. In particular, the company clearly acknowledged that adverse effects relating to its Defined Benefit Pension Scheme could interact with its ability to pay dividends in the future.

Connecting the dots

Much of our work touches on topics which connect with the challenges companies face when considering distributions including:

Sources and uses of cash: Our findings in the report on disclosures on the sources and uses of cash are also relevant to dividend disclosure. When thinking about dividend disclosure, a company may also do so in the context of how a dividend decision impacts on its capability to manage cash flows in times of uncertainty.
Section 172 statements: These may also serve as a good place for companies to provide more details on how they have considered stakeholder interests while making dividend decisions. Companies could demonstrate that through their stakeholder engagement activities, they understand shareholders' and other stakeholders' demands in relation to dividend policy. Refer to the report on reporting on stakeholders, decisions and Section 172 and to the FRC Guidance on the Strategic Report for more details.
Business model: Well-connected reporting is of great importance to investors. But reporting can only be based on what a company has done or plans to do. Business model and dividend policy are areas that necessarily tie together. Factors to consider are: the size of the company, its growth status and the nature of its operations. Investors expect a direct link between a company's business model, its capital allocation messaging and therefore, its dividend policy.

Conclusion

High-quality disclosure helps investors assess dividends as a source of consistent and sustainable returns. However, returns are always considered in the context of the wider economic environment, and not just on year-on-year basis. Better disclosure reflects and adjusts to the changing context. Whilst many companies have promised a progressive dividend policy, investors also expect disclosure to progress.