What it means
Companies that pay dividends typically split the year into two payments. An interim dividend is declared on half-year results when the directors have partial information, and the final dividend is declared once the audited full-year figures are available and the board can see the whole picture.
Because it is set with complete information, the final dividend is usually the larger of the two. Directors know the full-year profit, the cash position and the capital commitments for the year ahead, so they can be more confident about what the business can afford to distribute.
The approval route differs from the interim. Directors can generally declare and pay an interim dividend on their own authority, whereas a final dividend is recommended by the board and then voted on by shareholders, and it only becomes a liability in the accounts once approved.
Three dates govern who gets paid. The ex-dividend date is the cut-off after which buying the shares no longer entitles you to the payment, the record date fixes the register of entitled holders, and the payment date is when the cash actually arrives.
The final dividend also carries a signal. Because it is set with full-year knowledge, a cut or an unusually cautious final dividend is read by the market as management's own view of the year ahead, which is why boards go to considerable lengths to avoid reducing it.
In practice
Real-world examples.
Example
A listed utility pays an interim dividend of $0.11 per share in September and, after publishing full-year results in March, recommends a final dividend of $0.24 per share. Shareholders approve it at the annual general meeting in May and the cash is paid in June.
Example
A family-owned engineering company skips its interim dividend during a difficult first half, then declares a final dividend of $340,000 in total once a large contract completes profitably. The board explains the timing in its annual report to reassure minority shareholders.
Example
An investor buys shares two days before the ex-dividend date and receives the final dividend. A colleague who buys the following week pays a slightly lower share price and receives nothing until the next declaration.
Formula
Calculation
Final dividend per share = total dividend for the year - interim dividend already paid
Dividend payout ratio = total dividend for the year / earnings per share
Westmere Foods reports profit after tax of $12,000,000 for the financial year and has 40,000,000 shares in issue. The board targets a payout ratio of 60%.
Earnings per share: $12,000,000 / 40,000,000 = $0.30
Total dividend per share: 60% x $0.30 = $0.18
An interim dividend of $0.05 per share was paid in the first half
Final dividend per share: $0.18 - $0.05 = $0.13
Cash paid at the final dividend: 40,000,000 x $0.13 = $5,200,000
Total cash returned for the year: 40,000,000 x $0.18 = $7,200,000
That total of $7,200,000 is 60% of the $12,000,000 profit, exactly as the policy intended, leaving $4,800,000 retained in the business to fund growth and repay debt.Case study
Seen in the real world.
This is an illustrative, fictional example. Ashcombe Retail Group had paid a rising final dividend for eleven consecutive years and treated the record as close to sacred, so when full-year profit fell from $28,000,000 to $19,000,000 the board faced an uncomfortable decision.
Maintaining the previous total dividend of $0.42 per share across 60,000,000 shares would have cost $25,200,000 against profit of $19,000,000, a payout ratio of about 133%, funded by borrowing. The alternative was cutting the final dividend from $0.29 to $0.15, bringing the year's total to $0.13 plus $0.15, or $0.28 per share, which is $16,800,000 and a payout ratio of about 88%.
Ashcombe cut, and explained precisely why in a letter alongside the results, setting out the refit programme the retained cash would fund. The share price fell 9% on the day and recovered within four months, which the board privately regarded as a far better outcome than borrowing to protect a streak.
Watch out
Common mistakes.
- Assuming the final dividend is the whole year's dividend. It is only the second instalment, and the meaningful figure is the interim and final added together.
- Recording a recommended final dividend as a liability before approval. Until shareholders approve it, the company has no obligation to pay, so it is disclosed rather than accrued.
- Buying shares on the record date expecting the dividend. Entitlement is determined by the ex-dividend date, which falls before the record date to allow settlement to complete.
Questions
People also ask.
Why is the final dividend usually larger than the interim?
Directors set it with audited full-year results and a clear view of cash needs, so they can commit with more confidence than they could at the half-year.
Who approves a final dividend?
The board recommends it and shareholders vote on it at the annual general meeting, unlike an interim dividend, which directors can normally declare themselves.
Can a company pay a final dividend in a loss-making year?
It can if it has sufficient distributable reserves from past profits and enough cash, though doing so repeatedly erodes the balance sheet and usually draws criticism.
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