these are all financial matters, the view of the finance director on what the level of dividend should be is of considerable importance and he or she will almost certainly have a figure in mind. This proposed dividend will usually be discussed with the chief executive, and possibly the chairperson, ahead of the board meeting to see if there is a broad agreement among these key directors.
The finance director’s proposal will be put to the board meeting and if there is no alternative suggestion then that is that. If the chief executive feels strongly that a different amount is appropriate then a second proposal will be put to the meeting for debate and a vote will be taken on the rival amounts. In the event of a tie, the chairperson’s casting vote will decide.
Very often there is no debate, and any discussion would almost always be reasonable and courteous, however good or bad the results. A heated row is highly unlikely and would happen only if the results are disastrous and the dividend has to be reduced or suspended.
In the end, most dividends are agreed unanimously. The scope for manoeuvre is limited by the parameters set by the results.
One item that may be discussed is whether to rebalance the dividend. Sometimes a company may be cautious after the first half and hold down the interim dividend; if all goes well the final dividend can be raised. Thus the final dividend may become disproportionately large compared to the interim. In such a case the board may debate raising the interim dividend by a larger amount than the final to bring the ratio between the two dividends into line with the generally accepted norm of 33:67.
Case study: Wynnstay
According to Paul Roberts, the finance director of Wynnstay, the most important point in setting the dividend is to maintain balance.
His company, supplying agricultural products and pet foods, was floated on the Alterntive Invesrtment Market (AIM) in 2004 after two years on Ofex, the third tier trading system now called Plus. By August 2011 it had a stock market capitalisation of £54.5 million.
Initially it paid just one, final, dividend a year to keep down costs but introduced an interim dividend in 2006, roughly in the ratio of 1:2.
As the man in charge of the coffers, Paul is conscious of the need to retain sufficient cash to develop the business while providing some rewards for shareholders.
He says:
We have had a long term strategy, both prior to flotation and since, to give a clear view to the markets what our dividend policy would be. Because we are a small cap company we have a requirement for capital so retained earnings are an important part of our strategy. However, the message that we put out was that the dividend policy would be progressive, all other things being equal.
The directors were conscious that larger companies usually try to cover the dividend two or at most three times with earnings but Winnstay made it clear from the start that it would probably be targeting a higher dividend cover policy. The board felt a cover of about four times was appropriate.
Paul says this openness has been well received by the stock market – indeed some shareholders indicated that they would be willing to forego dividends in the early years to allow more cash to be invested in the company.
However, Wynnstay has stuck to its intention of increasing the dividend by 5-10% each year since it changed its financial year from the calendar year to the 12 months to 31 October in 2006.
Table 1.3 – Historic dividend payments by Wynnstay
Paul says:
The dividend virtually sets itself. If we were unable to extend the dividend by the expected amount we would probably find it necessary to give an explanation to the market.
He says that the board effectively only has to decide the odd decimal point in the dividend level and “there is rarely a big discussion”. As finance director he has an understanding of what the market is expecting and proposes what the dividend should be, possibly after chatting to senior colleagues, before presenting the results to his fellow directors.
Different types of dividends
Besides straightforward cash dividends (which is the main topic of this book), there are some other types of dividends – which are briefly described below.
Scrip dividends
Many companies offer you the opportunity to take your dividend in the form of more shares in the company rather than cash. This is known as a ‘scrip dividend’. The company will say in its results announcement whether it offers a scrip dividend.
Not all companies offer this option and it may not be available to you if you run an online account where shares are held in a nominee account. Check with your broker whether you will be able to elect to receive scrip dividends.
Basic rate income tax will still be deducted from the dividend before the number of scrip shares due to you is calculated according to the level of the cash dividend and the stock market value of the shares. New shares will be issued accordingly.
If, as is likely, the amount of the dividend is not divisible exactly by the share price and there is a fraction of a share left over, the difference is – depending on the particular terms of the scheme – paid to the shareholder, added to the next dividend, retained by the company, or given to charity.
If scrip dividends are issued to a company in your ISA account, the new shares qualify for tax relief under the ISA scheme.
Scrip dividends are attractive if:
You want to build up your investments.
You have a range of investments and are not looking to diversify into more companies.
The company is doing very well and you are happy to keep on investing in it.
You do not consider the shares to be overpriced.
Scrip dividends are not attractive if:
You want income to live on now.
You want to widen your portfolio.
Your portfolio is already weighted too heavily in shares in this particular company or the sector it operates in.
You feel that there are more attractive prospects elsewhere.
Dividend reinvestment plans
If a company you invest in does not offer scrip dividends, it may still be possible to take dividends in shares through a dividend reinvestment plan, known as a DRIP – an appropriate acronym not because dividend reinvestment plans are stupid, but because they allow you to drip more shares into your investment pot.
The difference between a scrip issue and a DRIP is that no new shares are issued with a DRIP. Instead, participants in the scheme have their cash dividend paid directly to the scheme administrator, which is usually the company’s registrar. The administrator
