Do all companies pay dividends?
By now you must have heard the buzz around dividends from the INVSTR community. Many speak about dividends and are determined to receive them in the short to long term, but is it the only way investors get rewarded?
What are dividends?
This is money that is paid out to investors by companies they are invested in. The money paid out to investors comes from the company’s retained earnings – either from profits or representing a refund from a disposal, if not a cancelled project. These can either be ordinary dividends or special dividends.
But should one really expect these payouts? Every company listed on the stock market can pay dividends, but it just depends on which one has declared a dividends payout.
Ordinary and special dividends?
A surge in profits for a company may result in ordinary and special dividends; an example of this would be Anglo American Platinum. The company declared an ordinary and special dividend during 2021. Commenting on the payout, Natascha Viljoen (Anglo American Platinum CEO) added that:
"Given the value distribution to other stakeholders, our strong balance sheet, robust market outlook and confidence in the underlying cash generation of the business, we have declared first-half dividends, consisting of both a base dividend and special dividend, amounting to R46.4 billion, R175 per share or a 100% payout ratio of headline earnings."
Both ordinary and special dividends may be as a result of high earnings, with special dividends not regularly paid compared to ordinary dividends.
Take a look at the companies due to pay dividends on our EasyBlog:
What happens if they don't pay in cash? While, in general, dividends are considered a way to reward shareholders, it's not always the way to go for some companies.
In some instances, instead of paying out dividends to shareholders, a company may consider reinvesting profits into new or existing projects. This allows the company to expand its new and existing projects that may result in unlocking more value through earnings. An example of this would be Discovery Limited which recently published its robust finances.
According to the company, "Despite the Group's robust capital position, due to the continued uncertainty and potentially volatile economic environment caused by the COVID-19 pandemic, the Discovery Board has decided to retain its prior stated position during the pandemic and has decided not to declare an ordinary final dividend for the period ended 30 June 2021."
A reduction in shares on the market, by a company, may take place to create more value for shareholders. This can be done through a share buy-back. A share buy-back is when a company buys back shares from the market, reducing the number of outstanding shares over a long period. The shares bought back may also be used to acquire other assets. This may increase a share price over time, with the available shares decreasing during the buyback program.
An example of a buy-back would be with South32 Limited.
The company recommenced its buy-back program after a strong performance. Graham Kerr, South32 CEO, said, "we have lifted the suspension of our on-market share buy-back. Our capital management program has $121m remaining and recommencing our buy-back will deliver immediate value to our shareholders."
But is it possible to have a buy-back together with a dividend payout?
This has happened on many occasions, especially during the "hot commodity cycle" - where the commodity industry experienced a bubble, leading to high earnings and profits for many mining companies. An example of this would be Anglo American PLC.
"Recognising the different preferences of our shareholders, we will split this additional return equally between a share buy-back programme and special dividend. Combined with our base dividend of $2.1 billion, today's $4.1 billion return recognises the resilience of our position and brings the cash that we will have returned to shareholders since mid-2017 to $10.3 billion," the company said, explaining the payout together with a buy-back program.
Rewarding additional shares
The typical way of rewarding is often in the form of dividends. A company may also offer shareholders the opportunity to receive additional shares, based on a prescribed ratio, e.g. 12 additional shares for every 100 shares owned. This may be an option where shareholders can choose whether they want to receive dividends in the form of shares or cash. In such a case, the reward of shares may be associated with a payout in line with the declared dividends.
An example would be Datatec; the company declared a special dividend of R5.12 with an opportunity for investors to get new shares at a ratio of 12.90431 for every 100 shares held.
In this case if you had 100 shares:
New ordinary share entitlement =
100 x 512 ZAR cents / 3967.66756 ZAR cents
= 12.90431 Scrip Distribution Shares
The rounding of the above distribution: 12 Scrip Distribution shares in respect of the 100 shares held and a cash payment of 3072.39323 ZAR cents for the fractional entitlement (calculated as follows 0.90431 x 3397.5 = 3072.39323 ZAR cents or R30.72).
The 3397.5 cents or R33.97 is calculated by the company from on a date specified shared with shareholders, using the volume-weighted average price (“VWAP”).
In Closing, the period it may take a company to reach the stage of profits to rewards may differ, from one company to another. However, considering the size and different investment strategies – one may be in a better position to take advantage of different shareholder reward mechanisms in the short to long term.