The Financial Reporting Council's (FRC) Financial Reporting Lab has published a report looking at how companies can make dividend disclosures more relevant for investors, given that very few FTSE 350 companies currently provide information in their annual reports on distributable profits
The regulator says that while some long-term institutional investors consider the disclosure of distributable profits is always required, the FRC considers that such disclosure may be useful in certain circumstances but is not mandatory.
However, disclosure is not common practice, with just 23 FTSE 350 companies disclosing the balance of distributable profits (or reserves) of their parent company in their 2014 annual report.
The aim of the Lab’s report, Disclosure of dividends - policy and practice, is to explore the issues and look at best practice, based on contributions from 19 companies and 31 investors.
The report suggests investors want to know why the company has selected the dividend policy; what that policy will mean in practice; what are the associated risks and constraints; and what was done in practice to deliver under the policy.
Investors said that they also wanted disclosure of the circumstances in which companies expect to pay special dividends or buy back shares, and whether they are in the best interests of shareholders.
All investors considered that the disclosure of dividend resources, ie, cash and the amount of the company’s reserves legally available for distribution under company law, 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.
The report also indicated that investors find that the dispersal of disclosures across annual reports and other communications results repetitive, making it hard for them to find the information they need. They said it would be helpful to group together similar or related disclosures on dividends, or to draw links between the disclosure elements.
Melanie McLaren, executive director of codes and standards at the FRC said: ‘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.
‘In the report, we highlight examples of good and proportionate disclosure practice. Investors said that terms such as “progressive” and “payout ratio” in respect of a company’s dividend policy or approach need to be clarified. They also told us that they recognise that the unexpected can and does happen and by providing disclosures, companies are not painting themselves into a corner.’
James Chalmers, PwC's UK head of assurance, said dividend disclosure has been causing confusion and concern with some investor groups, partly as the rules surrounding calculation of profits available for dividend payments are complicated and can be misinterpreted.
‘Good practice will be to give more detailed disclosures where the availability of resources could, in future, restrict a company's ability to pay dividends. This would be useful information for investors wishing to judge the security of future income flows,’ Chalmers said.
However, Chalmers cautioned against adding too much detailed information about dividend calculations, saying: ‘Extensive technical disclosure by those companies with ample resources should be avoided as this will only add to the clutter of the annual report. The concerns raised by investors are unlikely to be addressed by mandating a more detailed analysis of legal reserves of the parent company and in some cases this could even be misleading as it is companies, not groups, which distribute dividends.’
The FRC Lab report is here
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