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Chapter 4. Results Announcements and Annual Reports

The main source of information on dividends is the results announcements that are issued, in most cases, after the half year and full year. Companies paying four dividends a year are slightly different and we will look at them separately later in the chapter.

Most results are announced between three weeks and three months after the end of the period. Larger companies tend to report more quickly because although they have more figures to add up they have greater resources to cope with the task.

In the majority of cases the announcement will start with a brief summary and/or a series of bullet points outlining the key items in the results, such as turnover and profits. Since the board will naturally want to put the most bullish items at the top of the report, we would hope to see some reference to the dividend.

As an example, the interim results for retailer Next covering the six months to the end of July 2011 and issued on 14 September began thus:

Results for the Half Year Ended July 2011

In a difficult year Next has proven resilient. Group revenue for the first half was 3.6% higher than last year and profit before tax was up 8.5% on a continuing basis. The business remains strongly cash generative and continued buyback of shares further enhanced growth in earnings per share, which were 18.6% ahead of last year. The interim dividend increases by 10% to 27.5p per share. Financial highlights from our continuing business are as follows:

 revenue up 3.6% to £1,565m

 profit before tax up 8.5% to £228m

 earnings per share up 18.6% to 98.3p

 net debt of £640m and committed facilities of £918m

 interim dividend up 10% to 27.5p per share.

We should be suspicious but not paranoid if there is no mention of the dividend in the bullet points, or if the company launches straight into its report without picking out the salient facts. It could mean that there is no dividend or that the dividend has been held at a low level. However, it has to be said that some companies inexplicably hide their light under a bushel, so in such cases we will need to check further down the announcement to ascertain what the situation is regarding the dividend.

Back to the Next announcement.

The interim dividend has been raised by 10%, which is obviously great news. Companies tend to be cautious at half year, especially if their business is in any way seasonal. Although Next, selling fashions and homewares, is not as dependent on Christmas as some retailers, it still sells more goods in its second half to the end of January.

Furthermore, retailing was at the time suffering from rising costs and falling consumer confience so a 10% increase in the interim dividend was a real vote of confidence in itself. We can see from the bullet points that earnings per share were actually up by more than the dividend, so the dividend increase looks well justified and sustainable.

The final dividend, which as we noted in an earlier chapter is almost always larger than the interim and is often twice as large, may not be increased by the same percentage. Nonetheless, we can normally work on the basis that it will be, barring unforeseen circumstances.

By the time that the interim results are out any company will already have seen the first few weeks of second half trading and may, depending on the line of business it is in, have a good idea of how orders are flowing in.

One other point mentioned earlier also applies here: if the company is rebalancing its dividends to achieve a different proportion between the interim and the final, then we must tailor our expectations for the final dividend accordingly.

We should look for further clues in what the key executives say in the announcement. Usually the chairperson, the chief executive, the finance director or any combination of the three will have their say.

Sure enough, in the Next announcement we find a heading that says:

Chief Executive’s Review

Headlines

 Sales up 3.6%

 Profit up 8.5%

 Earnings per share up 18.6%

 Dividend up 2.5p to 27.5p

We have the original bullet points rehashed, this time with figures rather than percentages. So we now know the actual level of the dividend in pence and the increase in pence.

Further clues as to how the company is progressing, and thus the prospects for the final dividend, will be found in this review. So, again, reproducing from the Next announcement, we see:

Overview

Looking ahead to our full-year results, we believe that sales for the year will be between 2.0% and 4.5% ahead of last year, which would result in Group profits being up between +0.4% and +8.7% and EPS [Earnings Per Share] up between +7.5% and +16.4%.

Early indications are that retail headwinds are likely to ease as we move into 2012. We have strong evidence that there will be little or no inflation in our own prices and it seems probable that other inflationary pressures will ease as commodity price rises begin to annualise in the first quarter of 2012.

The overview may contain specific projected figures for the next quarter or, at the other extreme, a few meaningless platitudes. It may, as in this case, contain figures and a brief description of how events are unfolding. In any event the overview is quite likely to be short and we should not worry if it is brief provided it does actually tell us something.

Larger companies, especially those with international operations, may go into greater detail of how things are panning out in different parts of the business. There may also be greater detail if something momentous has happened, such as the scrapping of the dividend or the takeover of another company.

How useful any figures are depends on the company’s visibility of earnings. In the case of Next, it cannot reasonably see too far ahead as sales rely on the public mood and costs are at the mercy of volatile prices of energy and raw materials. Thus we have a wide spread in the forecasts for sales and profits.

The key part of the Next overview is that inflation, which had been running well above the Bank of England target of 2% for more than two years and was around 5% at the time of the statement, was easing off. Thus Next would have one less problem to cope with and would not be faced with trying to pass rising prices onto its customers.

Way, way down the statement, usually well after a series of tables showing the results and other figures, you will find something like this:

Dividend

The interim dividend is being increased by 2.5p to 27.5p. This will be paid on 3 January 2012 to shareholders on the register at 25 November 2011. The shares will trade ex-dividend from 23 November. For the full year we intend to raise the total of dividends payable by a similar percentage to the growth in basic earnings per share from continuing business.

This, as we can see, gives details of the size of the dividend, when it goes ex-dividend and when it will be paid.

In this case, although it does not always happen, we have the bonus of a clear indication of intent regarding the final dividend. Note that Next is clearly expecting to raise the final dividend, although not necessarily by the same percentage as it raised the interim dividend. Much will depend on where earnings per share come in within the 7.5% to 16.4% range indicated in the overview.

Within the tables contained in the announcement you will see one that tells you how much the dividend is costing the company:

Statement of changes in total equity

This simply records how much money the company paid out in dividends in the current period, in the comparable period of the previous year, and in the previous year as a whole. The figure appears in brackets because it is a payment made by the company rather than money received, just as, for example, interest payments made by the company are shown in brackets.

This figure will probably be of little interest to you. After all, your main concern is how much dividend per share you are getting. However, the figure can be useful to compare against profits and cash flow so you can be satisfied that the company can afford the dividend.

It is also useful if the company has issued shares in an acquisition, rights issue or placing. You can see if the total amount of the dividend has increased or whether the same amount of cash is being spread more thinly.

Note that, although Next’s final dividend is greater than its interim, it paid out more in dividends in the first half than in the second. This is quite normal. The paradox arises because the (smaller) interim dividend is paid out in the second half of the year while the (larger) final dividend falls into the following first half.

A company may feel moved to spell this out to readers, unfortunately not always in easy-to-understand terms, as this paragraph from the GlaxoSmithKline 2010 annual report demonstrates:

Under IFRS interim dividends are only recognised in the financial statements when paid and not when declared. GSK normally pays a dividend two quarters after the quarter to which it relates and one quarter after it is declared. The 2010 financial statements recognise those dividends paid in 2010, namely the third and fourth interim dividends for 2009 and the first and second interim dividends for 2010.

All Glaxo is saying is that its first two quarterly dividends appear in the accounts for the years in which they are declared, because they are paid before the financial year end, while dividends for the third and fourth quarters are paid after the year end and are therefore included in the following year’s accounts. Thus the accounts for 2010 show the amounts paid for the last two dividends of 2009 and only the first two for 2010. The two later 2010 dividends will be counted in the 2011 accounts.

On the whole, the annual report will tell you very little about the dividend that was not included in the results announcement. The exception is that the annual report will include a five-year record of dividend payments, something you rarely get in with the results. Thus DIY group Kingfisher included this table in its 2011 annual report:

Group five year financial summary

We can see that Kingfisher was transformed from a group struggling to cover its dividend even once to one with a progressive dividend policy and cover of nearly three times. This was achieved by reducing the dividend to a sustainable level and through a re-organisation in 2008-9 when asset writedowns almost wiped out earnings per share.

Note the importance of adjusted earnings per share in this table as this figure shows underlying earnings before exceptional items and gives a clearer picture of progress over the five years.

It would be useful if all annual reports contained this five-year table in exactly the same place and in exactly the same format. This does not happen. Some companies put the table proudly near the front while others bury it. Sometimes it appears as a table and sometimes as a bar chart.

It is much easier to search for the figures if you have the annual report in paper form. If you are looking online it may be a case of wading through the annual report page by page until you unearth it.

Key points

 The interim and full-year results announcements tell you how much the latest dividend is and by how much it has been increased or decreased.

 Look through the results for any clue as to what the next dividend is likely to be.

 You may have to search through the annual report for the vital five-year dividend record but it is worth the effort for the fuller picture it gives.