The perceptions of corporate managers on dividend policy in the UK: Evidence from London Stock Exchange firms

Using a survey approach, this research investigates the perceptions of corporate managers of dividend-paying and non-dividend-paying firms listed on the London Stock Exchange (LSE) to identify the factors/explanations leading to the decision to pay or not to pay cash dividends. Based on a direct information collected from 259 responses from 723 LSE-listed UK firms – resulting in a very good overall response rate of 35.8% of which 154 are dividend payers and 105 are non-payers, the findings of the research project lead to important conclusions. The findings of this research also have valuable practical implications. Understanding the common managerial perspectives about dividends may help LSE corporate directors compare their policies with their peers and review them to set optimum dividend policies. Knowledge about general dividend policy practices could assist investors and portfolio managers, who want to invest or have already invested in the UK market, for selecting companies with policies that best fit their dividend preferences. The direct evidence from LSE decision-makers provides new insights into the dividend debate in the UK and might help policymakers and regulators when designing dividend-related rules and regulations. The research results may benefit scholars and researchers who seek guidance on dividend policy in the UK context as well.

The research provides new survey-based evidence on the perceptions of corporate managers of London Stock Exchange (LSE) firms about their dividend policy decisions. This survey evidence is important because it supplies private information (primary data) from corporate decision-makers unavailable through publicly available sources. Relatedly, the findings of this survey research lead to several important conclusions for paying or not paying cash dividends in the UK market.

First, the survey findings reveal that the most important factors affecting the dividend policy of dividend-paying LSE firms relate to earnings and cash positions of the firms – particularly, the level of current earnings, level of expected future earnings, stability of earnings, and liquidity constraints such as availability of cash. Since earnings are closely related to cash flows which generally serves as a basis for distributing dividends, this finding suggests that LSE corporate managers place high importance on earnings figures while setting dividend policies. The pattern of past dividends and current degree of financial leverage are other important factors listed by the participating managers. These results are consistent with previous survey studies confirming what is already known regarding the factors influencing dividend payment decisions. However, confirming results across different markets and time periods is meaningful because it enables generalising the findings.

Second, the survey evidence shows that dividend-paying LSE-listed firms’ top executives believe that changes in dividends influence share prices and dividend policy affects firm value and therefore shareholders wealth. Thus, they think that they should create an optimal dividend policy to balance between current dividends and future growth that maximizes share prices. Moreover, corporate managers of dividend-paying LSE firms express general support for the signalling theory, Lintner (1956) model of dividends, tax-related, clientele effect and institutional investor effect explanations, catering theory and maturity (firm life cycle) hypothesis, whereas the agency cost and pecking order theories are partially supported. However, the survey findings do not support the-bird-in-the hand hypothesis and residual dividend policy. Overall, the results present multiple theories for paying cash dividends in the UK market, which is against the notion of a universal or “one-size-fits-all” explanation for paying dividends.

Third, the research results illustrate that the most important reasons behind non-dividend-paying LSE-listed firms’ decisions for a no cash dividend policy are the availability of cash, stage in the firm’s life cycle, level of current earnings, preference to reinvest cash flows instead of paying cash dividends, anticipated level of future earnings, and availability of profitable investment opportunities. These findings suggest that poor profitability means low levels of earnings which result in less availability of cash, or even cash shortages, then this leads LSE firms to paying low or no cash dividends. Furthermore, consistent with the maturity (firm life cycle) hypothesis, LSE-listed companies in their growth stage and with profitable growth opportunities typically require more fund to finance their investments. Thus, it would be more logical to use their internal funds to invest in new projects instead of paying these cash to shareholders.

Fourth, the survey findings present some evidence that non-dividend-paying LSE companies are responsive to their shareholders’ preferences in setting a no cash dividend policy. The results show inconclusive information for the potential signalling effect on the decision to pay no dividends and detect no evidence that non-dividend-paying LSE managers view taxes as a major reason for not paying dividends. Moreover, the evidence indicates that high level of insider ownership is not necessarily meant to be a reason for a no cash dividend policy. However, the cost of raising external funds (debt) is one of the most important reasons inducing LSE companies not to distribute cash dividends, whereas the transaction costs that shareholder might experience is not considered as important.

Fifth, the survey evidence from non-dividend-paying LSE managers indicates that the substitution role of share repurchases for dividends does not have a significant impact on the decision for a no cash dividend policy in the UK. Furthermore, dividend-paying LSE firms make a noteworthy use of share repurchases.
Although dividend-paying managers perceive share repurchases as a useful tool, they do not view repurchases as a perfect substitute for cash dividends – the usefulness includes using share repurchases to signal insider information to the market, to adjust corporate capital structure and to increase earnings
per share of their firms.

Finally, the survey results display that the state of the economy has significant effects mostly on dividend-paying LSE firms’ dividend policy decisions but does not have a noteworthy impact on non-dividend-paying LSE firms’ decision for a no cash dividend policy. Especially, the COVID-19 pandemic had significant effects on the dividend-paying firms’ ability for distributing a cash dividend, but the Brexit did not. The findings further reveal that the coronavirus pandemic severely affected the level of earnings of dividend-paying LSE firms, thus their decisions to pay dividends (both the possibility and amount). In fact, although most dividend-paying LSE firms had no change in their overall dividend policy, they suspended, or decreased, cash dividend payments temporarily, due to the various impacts of pandemic such as reduced sales, low earnings or losses, uncertainty and receiving government funding (e.g., furlough schemes). Nevertheless, non-dividend-paying LSE firms’ no cash dividend policies was not affected by the COVID-19, because these companies were already unable to distribute dividends as being a pre-revenue exploration or R&D company, making losses or not having sufficient funds over time, or being a small firm in its growth stage even before the coronavirus hit the economy.

Overall, the findings of this research provide useful insight into the dividend debate in the UK from corporate decision-makers. This survey research also serves as a valuable benchmark for future survey studies investigating dividend policy practices in other countries. Using the same or similar questionnaires, such studies could help corroborate the empirical results and permit identifying similarities and differences between different markets.