Dividend

How a Nordic dividend is decided and paid

1. Proposal. The board proposes the dividend for the financial year, usually in the financial statements release in January or February. Some boards instead ask the AGM for an authorisation to decide on the dividend later.
2. Decision. The annual general meeting approves the dividend, typically in March, April or May. It cannot approve more than the board proposed.
3. Ex-dividend date. The first trading day on which the share no longer carries the right to the dividend. On the Nordic exchanges it is one business day before the record date, and the share price usually drops by about the amount of the dividend that morning.
4. Record date. Shareholders entered in the shareholder register on this date receive the dividend.
5. Payment date. The dividend is paid, usually a few business days after the record date.

When the dividend is paid in instalments, each instalment has its own ex-dividend, record and payment date. The dividend table on each Finpendium company page shows whether a dividend is still a board proposal or already decided.

How to judge a dividend

• Payout ratio: dividend per share divided by earnings per share. It shows how much of the year’s earnings is paid out; see the payout ratio.
• Dividend yield: dividend per share divided by the share price. It shows the cash return on the price you pay; use the dividend yield calculator.
• Cash cover: compare total dividends with free cash flow. A dividend that is paid out of borrowing is not sustainable for long.
• History and policy: many Nordic companies have a stated dividend policy and aim for a stable or rising dividend. A long record of steady dividends through downturns says more than one high yield.
• Balance sheet: a company with high debt may have to choose between paying dividends and reducing debt when earnings fall.

What a dividend does not tell you

• A dividend does not create value by itself. On the ex-dividend date the share price falls by roughly the amount paid, so the shareholder’s total wealth does not change at that moment. The return comes from the profits that make the dividend possible.
• A high yield can be a warning. A yield that looks unusually high often reflects a falling share price and a market that expects the dividend to be cut.
• Taxes differ. Dividends are taxed differently in each country, and foreign shareholders usually pay withholding tax, which can partly be reclaimed under tax treaties. The return after tax can differ a lot from the headline yield.
• Buybacks are not counted. A company that returns cash mostly through share buybacks may look stingy on dividends alone.

Company law also limits dividends. In Finland, for example, a company may distribute only its distributable equity, and not at all if it knows, or should know, that it is insolvent or would become insolvent because of the distribution.

Other ways companies return cash

• Extra or special dividends are one-off payments on top of the regular dividend, often after selling a business or a year of unusually strong cash flow.
• Return of capital. Finnish companies can distribute funds from the reserve for invested unrestricted equity. For the company it is the same cash outflow as a dividend, but the tax treatment for shareholders can differ.
• Share buybacks return cash by purchasing the company’s own shares. Shareholders who keep their shares own a larger part of the company; see share buyback.
• Scrip dividends give shareholders new shares instead of cash, or a choice between the two. They are rare in the Nordic countries.