Improved dividend disclosures: FRC report
The FRC’s Financial Reporting Lab has outlined ways in which companies can improve their dividend disclosures. This follows a project in response to interest from a group of long-term institutional investors who consider that companies should always disclose distributable profits.
The Lab notes that there are differing views as to the usefulness of making disclosures on distributable profits. Many investors consider that disclosure should be proportionate to the company’s circumstances and is useful where the ability of the company to pay dividends is, or might be, constrained but do not go as far as to require disclosure in all circumstances. Company practice is also diverse; only 23% of FTSE 350 companies disclosed the balance of parent company distributable profits in their 2014 annual report and accounts.
In relation to other matters, the report notes that investors would like to see information on:
- the rationale for a company’s dividend policy, including information on how this relates to the company’s business model and strategy, how it will be implemented and how capital will be maintained;
- what the dividend policy will mean in practice. If the policy is described as “progressive”, investors want to understand whether the company actually intends to maintain or increase the dividend annually and, if increasing, by how much. Where a pay out ratio approach is used, investors want clarity on the basis and calculation of the ratio;
- the risks and constraints associated with the policy, such as availability of cash, gearing levels, debt covenants and regulatory capital requirements. Boilerplate lists should be avoided and disclosure should focus on the constraints that are most pertinent to the company’s policy; and
- what was done to deliver the policy. There could also be better linkage between the disclosure of the declaration of the dividend and the dividend policy and if a declaration has resulted in a dividend which is not in line with the policy, there should be a disclosure explaining why and the likely impact on future dividend policy and practice. Investors also like information on the level of resources at, or available to, the parent, including an indication of how the dividend payment will be funded.
Investors also like disclosure on the circumstances in which companies expect to pay special dividends or the buy back shares. In respect of buybacks, investors look for disclosure of the maximum price the company is prepared to pay and the target minimum rate of return as well as summary information on the weighted average cost of shares bought, total cost, and the effect on key metrics for buybacks undertaken during the year. Retail investors also like boards to explain their assessment of how buy backs benefit shareholders.
The report notes that disclosures in annual reports are often spread across the strategic report, financial statements and shareholder information sections. Investors would like these disclosures to be grouped together in the annual report to avoid repetition and promote coherence.
The FRC Lab report can be found here.