Why are we waiting? Dividend delays amongst the UK blue chips
The Munro Fund is built 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. 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 such 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 reviewed the top 25 dividend payers (which together represent almost three-quarters of the dividend income available from the FTSE 350) and detailed these time lags and the wide variation from one company to another.
It is worth explaining the typical dividend timetable for a major listed company, using Vodafone (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 May 22nd, with a payment date for shareholders set for August 1st. This is a gap of 71 days, or 123 days since the year-end. For those who hold Vodafone indirectly through funds, such as the Munro 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 2 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. SSE’s final dividend took an incredible 174 days after the financial year-end to be paid, whilst Centrica was little better at 165 days. Not far behind were BT and Reckitt Benckiser, at 156 and 152 days respectively. The latter at least has significant overseas earnings which could lead to delays. But this excuse is refuted by the range of companies who manage to reward their shareholders within 12 weeks of their year-end (84 days). These include international companies such as Royal Dutch Shell, AstraZeneca and Unilever, with Barclays achieving less than 11 weeks. 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 Aviva, Centrica and Imperial Tobacco were not far behind. Again quarterly payers proved the most efficient.
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. We developed a crude measure (“Weighted Payment Days” or 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 Tesco performs well on 149 days. The average for the former was 184 days as against 236 days for those paying twice a year. (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).
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 the Munro Fund intends to 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 S & W Munro UK Fund is a physical long-only smart-beta fund that invests in the FTSE 350 Index and complies with The Stewardship Code.)