Interim dividends and final dividends are two common types of dividends issued by most companies. Established companies follow a consistent dividend policy to offer income to dividend investors.
Both types of dividends offer some advantages and disadvantages to the issuers.
Let us discuss what are interim and final dividends and their key differences.
What is an Interim Dividend?
An interim dividend is a type of dividend issued before the end of the fiscal year of a company.
An interim dividend is issued before the annual general meeting (AGM) and before releasing the annual financial statements of the company.
The interim dividend announcement is made on projected results. Companies issuing interim dividends use retained earnings.
Like a normal or final dividend, the interim dividend can also be issued in cash or stock form. However, it is often issued in smaller amounts as compared to a final dividend.
Interim dividends are issued with quarterly results. Usually, the announcement accompanies unaudited financial reports like SEC filings and 10-Q forms.
Unlike a normal dividend, interim dividends are declared by the board of directors. However, the declaration requires approval from shareholders.
Interim dividends are commonly issued quarterly in some countries like the US. Some companies also issue interim dividends semi-annually.
Why Do Companies Issue Interim Dividends?
There are various reasons and objectives for issuing interim dividends.
The foremost reason is to share annual profits among a company’s shareholders. Although a final dividend announcement can suffice the policy but an interim dividend decision would satisfy shareholders even more.
Another common reason for interim dividends is to distribute exceptional profits occasionally. When companies make large profits, they can either reinvest them for internal growth or distribute them to shareholders.
Sometimes the board of directors may issue interim dividends as a financial management strategy of the company. For instance, issuing interim dividends before announcing the fiscal year’s results would reduce profits.
That in turn would reduce the corporate tax liability of the company. Thus, it can be used as a tax management tool as well.
In other scenarios, interim dividends can be announced to complement the annual dividend policy of the company. If the company pays regular dividends semiannually or annually, it may issue interim dividends quarterly to support shareholders’ income.
A real-world example of an interim dividend announcement is a recent decision by Ferrexpo Plc (LSE: FXPO).
The company announced an interim dividend of 6.6 US cents per ordinary share last year. The company had already paid interim and regular dividends during the last year that totaled 46 US cents with this announcement.
Pros and Cons of Interim Dividends
Companies often issue interim dividends for various reasons. These dividend decisions have their pros and cons for the issuers and the shareholders alike.
The interim dividend is a useful tool to distribute the seasonal profits of a company. It can be issued before the AGM and by the board of directors at any time.
Interim dividends also satisfy shareholders looking for consistent income through dividends.
Sometimes, companies issue interim dividends to reduce their corporate tax liabilities before announcing fiscal year’s final results.
Interim dividends are commonly issued by companies with a consistent dividend policy. Interim dividends also send a positive signal to the market that can help raise the stock prices temporarily.
Interim dividends can only be issued if allowed in the article of association of the company. The BOD issues interim dividends, however, shareholders must approve them.
Interim dividends are issued from the retained earnings of a company. However, it may not be a suitable option for companies with low retained earnings and cash flow issues.
The reserves used for paying interim dividends can be allocated for internal growth projects. It may also have a negative signaling effect on the share prices of the company as shareholders may perceive that the company is out of options for positive NPV projects.
What is a Final Dividend?
A final dividend is the type of dividend that is issued at the annual general meeting of the company. It is announced after declaring the financial results of the company.
A final dividend or regular dividend is issued after releasing audited financial statements of the company. It is announced and proposed by the BOD and approved by shareholders of the company.
Once approved, the final dividend cannot be revoked unlike the interim dividend. The amount per share of the final dividend is larger than interim dividends.
Final dividends can also be issued in the form of cash or stocks. As the company knows its financial position, it can decide accordingly.
Also, companies may borrow funds for issuing final dividends. It is particularly true for companies following a consistent dividend policy when they face liquidity issues.
Final dividends are approved once by the BOD. However, a company may issue the amount of the total dividend quarterly, semiannually, or annually as per the company dividend policy.
Why Do Companies Issue Final Dividends?
Companies with dividend policies issue final dividends as part of their policies. Once chosen, they must follow the company policy to satisfy their shareholders.
Companies earning profits and retained earnings must invest them in positive NPV projects or distribute them to shareholders. When companies do not have positive NPV projects they pay dividends to shareholders.
Another objective behind issuing final dividends is to attract investors. When investors are assured of a consistent income stream, they’ll invest in a company’s stocks. That in turn will keep the demand and hence the share prices higher.
The signaling effect is another reason why companies consider paying dividends. Some companies consider it a positive sign to exhibit a strong financial position by paying regular dividends.
Finally, dividends are also paid to follow a balanced capital allocation strategy. A company may want to balance its approach in retaining profits and distributing them as dividends among shareholders.
Many companies around the world pay dividends. Most established stocks offer dividends consistently.
These dividends are often announced as final dividends by these companies. Some stocks also issue interim dividends as mentioned above.
Some top companies issuing dividends include:
- Coca cola – $ 1.68 annual
- Proctor and Gamble (PG) – $ 3.48 annual
- Equinix – $ 2.28 per quarter
- Lockheed Martin – $ 2.2 per quarter
Pros and Cons of Final Dividends
Final dividends offer some advantages and disadvantages to the issuers and shareholders alike.
Final dividends are a useful method of allocating retained earnings and cash resources of a company.
Final dividends are offered by companies fulfilling their promise of consistent dividend policies. This strategy also attracts new investors and keeps share prices stable.
Also, final dividends provide income support to dividend investors. Established companies often issue dividends as goodwill gestures to their investors as well.
Dividends may not be sustainable for growth companies in the long term. Also, some companies may have to borrow funds to issue dividends sometimes.
Issuing final dividends may send a negative signal to shareholders as a perception that the company lacks other investment opportunities.
Interim Dividends Vs Final Dividends – Key Differences
Let us summarize some key differences between interim and final dividends below.
The interim dividend is a type of dividend that is issued by the BOD before audited and approved financial statements are issued by the company.
The final dividend is a type of dividend that is issued after the audited financial statements and fiscal year results are announced.
Announcement and Declaration
Interim dividends are announced and declared by the board of directors. However, the BOD would require formal approval from shareholders.
The announcement and declaration are made before the annual general meeting (AGM).
Final dividends are also announced and declared by the BOD. They are also approved by the shareholders in the AGM.
Final dividends do not require any article of association clauses. These are obligatory for any company and can be approved by shareholders in the AGM.
However, once approved, final dividends cannot be revoked.
Interim dividends are only issued if there is a provision in a company’s article of association. Interim dividends can be revoked even after the announcement.
Source of Capital
Interim dividends are paid out of the retained earnings and reserves of a business. Most businesses only offer interim dividends when they have sufficient reserves or occasional cash surplus.
Final dividends are also paid out of retained earnings. However, many companies borrow external funds to issue dividends when facing liquidity challenges.
Interim dividends are often issued to disburse seasonal profits. Sometimes, companies would issue interim dividends when they couldn’t offer a regular dividend in previous quarters.
On the other hand, final dividends follow a more consistent dividend policy. Issuing final dividends is part of the long-term dividend policy of a company.