The evolving relation between dividends and flexible payouts: A different evolution

Seth Armitage,Ronan Gallagher

doi:10.1111/eufm.12288

Abstract

AbstractWe study payout by UK listed companies during 1993–2018. Regular dividends remain the dominant channel, but flexible payouts (special dividends and repurchases) have grown, and they make total payout more responsive to earnings. Flexible payouts are used to augment regular dividends: few companies pay out by flexible means only, and tests indicate that they augment rather than replace regular dividends. Comparison with US evidence shows that UK companies make greater use of dividends (including specials) in relation to repurchases, and have a greater willingness to change regular dividend per share.

Highlights

There have been major changes in the nature of payouts to shareholders by listed companies
We find that regular dividends in the United Kingdom are markedly more flexible than in the United States, measured by the proportion of firm‐years with a change dividend per share (DPS)
To provide some background on their use, we show that special dividends are less frequent and larger than repurchases, and that the primary motive for most small repurchases is to obtain shares for re‐issue rather than to pay out cash

Summary

| INTRODUCTION

There have been major changes in the nature of payouts to shareholders by listed companies. Over half of repurchases are small (less than 1% of assets) and most of these are made by or on behalf of the company's employee benefit trust, primarily to provide shares for share‐related pay awards rather than to pay out cash We include such repurchases in flexible payouts, but they are less likely to be viewed by managers as a substitute for regular dividends than are non‐pay‐related repurchases. There are similarities in payout trends: large increases in repurchases since the 1980s in both countries (but smaller in the United Kingdom, in relation to dividends); long‐term declines in dividend flexibility measured by SOA to earnings; the use of repurchases to increase payout flexibility; partial recoveries in recent years in the proportions of listed companies that pay a regular dividend, and in the propensity to pay. Pay‐related repurchases could potentially affect the company's policy regarding dividends

| RESULTS

Method

Findings

| Discussion

| CONCLUSION