This article is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors.
As an investor, it would be fair to operate on the premise that the lion’s share of investment returns from the stock market are derived from the compounding effect of the reinvestment of dividends. The evidence from the Barclays Equity Gilt Study suggests this accounts for as much as 90% of the total returns from the UK market over the longer term. The importance of dividends is recognised in well-known valuation methods such as the Gordon Growth Model, which estimates the present value of future dividends to derive company valuations.
Given the importance placed on dividends ... it is strange that so little attention has been paid to the way many companies delay releasing dividend payments to their shareholders
A more pragmatic approach to the importance of dividends is that they are “real” in the sense that once declared and paid, they represent hard cash that cannot be reclaimed by a company. They thus provide a more tangible measure of the financial health of a company than profits or earnings, which are subject to the whims of the auditor, can be subjected to “aggressive” accounting or even restated in later years.
Given the importance placed on dividends by investors, it is strange that so little attention has been paid to the way many companies delay releasing dividend payments to their shareholders.
We recently reviewed the top 25 dividend payers (which together represent almost three-quarters of the dividend income available from the FTSE 350) and detailed these dividend time lags and the wide variations from one company to another.
It is worth explaining the typical dividend timetable for a major listed company, using
Vodafone (VOD) (the largest UK listed dividend payer) as an example. Vodafone has a March year-end. The annual results, and proposed dividend, were announced this year on 22 May, with a payment date for shareholders set for 1 August. This is a gap of 71 days, or 123 days since the year-end. For those who hold Vodafone indirectly through funds, such as a fund with a January year-end (and thus a July half-year end), this dividend income cannot be paid out until the end of the first half of next year, i.e. the end of May 2013. This is well over two years since the start of the financial year in which Vodafone earnt this money.
Vodafone as it happens is a faster payer than the majority of the top 25 companies. The average gap for these companies between the declaration of the final dividend and its payment is about 82 days. This rises to 121 days when measured from the year-end. The range is huge and deserves an explanation from the companies.
The slowest payers seem to be UK utility companies, who penalise their own domestic customers for late payment and cannot use the excuse of delayed receipt of overseas earnings for the late payment of dividends to their shareholders.
A note of caution is required here, as all of these “star performers” except AstraZeneca pay quarterly dividends and these tend to be paid out more efficiently than half-yearly dividends. On average those companies paying a fourth interim dividend released cash about 41 days faster than those paying a final year-end dividend, as measured from the year-end.
Very similar patterns emerged for interim dividends. Interim dividends are nearly always a much smaller payment and tend to be delivered more swiftly. The gap between half-year end and the dividend payment for the average company was 101 days as against 121 days for the final. Payment tended to be much quicker for nearly all companies. SSE’s delay, though, hardly changed and it retained the bottom slot, whilst
But keep in mind, this analysis takes no consideration of the relative size of the interim payment and its timing in relation to, perhaps, a more tardily paid final dividend. Through the receipt of an interim dividend, shareholders at least receive a share of the year’s earnings before the end of the financial year.
Taking the analysis a step further, we developed a crude measure, called “Weighted Payment Days (WPD), to reflect the offsetting potential of a disproportionately large interim dividend, and potentially its early payment. Both the interim and the final dividend payment date were measured in relation to the mid-year, the point at which the company on average “earns” its full-year profits. Unsurprisingly the same two companies, SSE and Centrica, came out as the slowest on the WPD measure, at 302 days and 290 days respectively.
Those paying quarterly dividends tend to come out best on this measure, though amongst semi-annual payers(For simplicity only the second and fourth interims paid by those issuing quarterly dividends have been included in this initial analysis. Adding the two other quarterly payments is unlikely to change the result materially).
Paying quarterly dividends is generally a faster way of rewarding shareholders than the traditional semi-annual disbursement
The conclusion is that some companies hold onto shareholders income much longer than others. Paying quarterly dividends is generally a faster way of rewarding shareholders than the traditional semi-annual disbursement. With this in mind, fund managers may want to consider moving to quarterly payments to reward shareholders. Heeding our own research and advice, the managers at Fundamental Tracker's Munro Fund intends to now move to quarterly payments. By bringing payments forward this should bolster the current yield of 3.9%. If some of the slow-paying companies mentioned above did the same, their shareholders would benefit as well.
The original version of this article was written by Philip Graves, deputy fund manager at Fundamental Tracker Investment Management. The article was originally published in "The Munro September Update" e-newsletter.
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