U.K. Investors Seek Dividend Info in Single Area of Annual Report

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By David R. Jones

Nov. 25 — U.K. companies could improve their financial reporting and pool their dividend disclosure policies into one report, thereby making their economic information more useful to investors, a report published Nov. 25 by the U.K. Financial Reporting Council said.

The analysis issued by the Financial Reporting Lab, FRC's research arm, found that “information on dividend policies and practices is important to a wide range of investors.”

Allocating Cash

This information includes equity investors seeking income or growth potential, as well as bond investors assessing a company's creditworthiness.

“Both equity and debt investors want to understand how the cash generated by a company is allocated, and why this is appropriate,” according to Disclosure of dividends - policy and practice, based in part on interviews and roundtable discussions with 19 company executives and 31 investors.

Wide Range of Practices

Investors have found, however, a broad array of practices among U.K. companies in their disclosures of dividend policy.

Just 23 of FTSE 350 companies, for instance, disclosed the parent company's balance of distributable profits—the level of reserves legally available for distribution—in their 2014 annual reports and accounts.

“Dividends are only one part of the total return that investors receive, but for many it is the most important part, and therefore good disclosure is fundamental,” one investor told lab researchers.

Addressing Key Questions

In particular, investors want companies to address such questions as why a company has adopted its disclosure policy and how the policy ties into the company's capital-management strategy, as well as what risks and constraints this poses.

“Investors note that the link between companies' principal risks disclosures and risk to the dividend policy is often not well articulated,” the report said.

A critical area of interest for investors, the report said, is whether a company has sufficient distributable profits plus cash—together known as dividend resources—to pay its proposed dividend now or in the future.

Scattered Disclosures

Investors sometimes find it tough to frame a company's financial outlook if it scatters dividend disclosures across different sections of its annual report, which investors consider the key information source on dividends once it is published.

These disclosures in annual reports often are spread across a company's strategic report, financial statements and shareholder information sections, investors said.

Single Source Preferred

“The recent reports from the Lab on digital reporting and accounting policies demonstrate that investors prefer to have all relevant information together within one document,” even if it's included in an appendix, the report said.

Placing dividend disclosures in a single document helps investors pinpoint useful information, the lab noted, and makes it easier for them to draw comparisons among companies.

Concerns About Disclosure

Some companies participating in the project voiced concerns about providing extensive details about their dividend policies, saying it could hamstring their flexibility in responding to events and situations.

The report doesn't set out a one-size-fits-all policy on dividend disclosures, instead offering investors' recommendations and examples of how some companies handle disclosures on such topics as payout ratios, cash resources, and special dividends and share buybacks.

“Given the complexity of individual groups and circumstances, the generation of a single set of best practice disclosures applicable to all companies is not practical,” the lab said.

Welcoming Feedback

FRC is encouraging stakeholders to respond to the lab report.

“As far as possible, comments will be taken into account in shaping future projects,” the council said.

Warning About Excessive Detail

In a Nov. 24 blog on the PricewaterhouseCoopers web site, PwC's UK Head of Assurance James Chalmers called dividend information “an important area of disclosure which has caused confusion and concern in some investor groups.”

He cautioned, however, against requiring greater detail in analyses of parent companies' legal reserves. “In some cases this could even be misleading as it is companies, not groups, which distribute dividends.” he pointed out.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: Ali Sartipzadeh at asartipzadeh@bna.com

FMI The lab report is available at https://www.frc.org.uk/Our-Work/Publications/Financial-Reporting-Lab/Lab-Project-Report-Disclosure-of-dividends-–-poli.pdf