How to Calculate Proposed Dividend

A public company, in the course of its operations, may choose to distribute a portion of its profits to shareholders in the form of dividends. Dividends are an essential part of a company’s financial strategy, as they serve as a method for rewarding shareholders and sharing profits. However, the decision to declare a final dividend is not something that is made unilaterally by the company’s management or board of directors. Instead, this decision is subject to a process that involves a recommendation or proposal by the company’s board of directors, followed by approval from the company’s shareholders at the annual general meeting (AGM). This process is a critical part of corporate governance, ensuring that shareholder interests are considered and that the distribution of dividends aligns with the financial health and long-term strategy of the company.

At the heart of this process is the company’s board of directors, which is responsible for overseeing the company’s operations and making strategic decisions on behalf of the shareholders. The board is tasked with managing the company’s finances, monitoring its performance, and ensuring that the company remains on track to achieve its objectives. As part of its responsibilities, the board considers the allocation of profits, including whether to distribute a portion of those profits as dividends. The board’s recommendation for a dividend is based on several factors, including the company’s profitability, cash flow, financial health, and future growth prospects. By recommending a dividend, the board essentially signals its confidence in the company’s ability to generate sufficient cash flow and continue operating effectively in the future.

Once the board of directors has decided on the proposed final dividend, it is not automatically implemented. Instead, it is submitted for approval at the company’s annual general meeting (AGM), where shareholders are given the opportunity to vote on the proposal. The AGM is an important event in the corporate calendar, as it provides shareholders with a platform to express their opinions, ask questions, and make decisions on key matters affecting the company. The proposed dividend is just one of the items on the agenda that shareholders will vote on during the meeting. Shareholders who attend the AGM or participate through proxy voting are asked to approve or reject the dividend recommendation.

The approval of the final dividend by shareholders is essential, as it ensures that the distribution of profits is carried out in a manner that aligns with the interests of the company’s owners—the shareholders. This process emphasizes the democratic aspect of corporate governance, where the company’s leadership (the board of directors) proposes decisions, but the shareholders, as the ultimate owners, have the final say. In this sense, the approval of the dividend is a reflection of the shareholders’ trust in the company’s management and their satisfaction with the proposed dividend payout. If the shareholders approve the dividend, the company can proceed with the distribution. If the dividend proposal is rejected, the company may need to revise its financial strategy or reconsider its cash distribution policy.

The role of shareholders in approving the final dividend is particularly important because it reflects their ownership rights and interests. Shareholders invest in companies with the expectation of receiving a return on their investment, and dividends represent a portion of that return. Therefore, the shareholders have a vested interest in ensuring that dividends are paid out in a manner that is fair and sustainable. It is important to note that while the board of directors may recommend a dividend, the shareholders have the power to decide whether the payout is justified based on the company’s financial position. This is especially relevant in cases where the company may have experienced financial difficulties or where there is a need to conserve cash for future investments, debt repayments, or other operational needs.

In many cases, companies with stable earnings and strong cash flow are more likely to propose a final dividend, as they have the financial capacity to share profits with shareholders without compromising their operations or future growth plans. For such companies, the proposed dividend is often seen as a way to reward shareholders for their investment and to signal the company’s ongoing success. In contrast, companies facing financial challenges, such as declining profits, increased debt, or uncertain market conditions, may choose to reduce or suspend their dividends altogether. In such situations, the board of directors may still propose a dividend, but it will be subject to careful consideration of the company’s ability to continue making the payment without jeopardizing its long-term stability.

One of the key reasons why the approval of the final dividend by shareholders is necessary is the need to maintain a balance between distributing profits and retaining earnings for reinvestment. Companies that choose to reinvest profits back into the business, rather than paying them out as dividends, may be doing so to fund growth initiatives such as research and development, capital expenditures, or acquisitions. In these cases, the board of directors may propose a lower or zero dividend payout, with the intention of using the retained earnings to support future business expansion. This strategy can be beneficial for the long-term growth of the company, as reinvestment can lead to increased profitability, enhanced market position, and ultimately higher shareholder value. However, shareholders may be less pleased with a low dividend payout, particularly if they are relying on the income generated from dividends. As a result, the shareholders’ approval is crucial in ensuring that the company’s financial decisions are aligned with their expectations.

Another important factor in the dividend approval process is the regulatory environment and legal requirements governing dividend payments. Different countries and regions have varying rules and regulations that govern how dividends can be paid out. In some jurisdictions, companies are required to adhere to specific guidelines when determining dividend payouts, including maintaining a certain level of earnings or reserves. In these cases, the board of directors must ensure that the proposed dividend complies with local laws and regulations before submitting it for shareholder approval. Shareholders are also protected by these regulations, which are designed to prevent companies from making excessive or unsustainable dividend payments that could harm the company’s financial position or leave it unable to meet other financial obligations.

The company’s articles of association or bylaws may also play a role in determining how the final dividend is proposed and approved. These legal documents outline the company’s internal rules and procedures, including how dividends should be declared and paid. The articles of association may specify the voting procedures for dividend proposals, including whether a simple majority or a special resolution is required for approval. In some cases, the company may even have different classes of shares, with different dividend entitlements, which could affect how the dividend is allocated and approved.

The timing of dividend approval is another important aspect of the process. The annual general meeting, where the final dividend is usually proposed, is held once a year, typically after the company’s financial year has concluded. However, the exact timing of the dividend payment may vary. Once the dividend is approved by shareholders, the company will set a date for the distribution, known as the "ex-dividend date" and the "payment date." The ex-dividend date is the date on which the stock begins trading without the entitlement to the upcoming dividend, while the payment date is when the dividend is actually paid out to shareholders. These dates are important for shareholders, as they determine when they will receive the dividend and how it will be accounted for in their investment portfolios.

The process of proposing and approving a final dividend at the annual general meeting is a vital part of corporate governance, as it ensures transparency, accountability, and shareholder involvement in the financial decisions of the company. By requiring shareholder approval, the company upholds the principle that dividends are not just a discretionary reward for shareholders, but a decision that reflects the company’s overall financial strategy and ability to sustain its operations. While the proposal of a final dividend may be seen as a sign of financial strength and stability, it also requires careful consideration of the company’s long-term growth objectives, cash flow needs, and the interests of its shareholders. Through this process, both the board of directors and the shareholders play an important role in shaping the company’s financial future, ensuring that dividends are paid in a way that benefits both the company and its investors. Ultimately, the decision to approve a final dividend is a reflection of the company’s commitment to creating value for shareholders, maintaining financial discipline, and fostering long-term success.

Here you'll learn how to calculate proposed final dividend:

Example:
CTU Ltd has the following share capital as at 31 December Year 20:
Authorized share capital:
1,000,000 7% Preference Shares of $0.50 each: $500,000
20,000,000 $0.50 ordinary shares: $20,000,000

Allotted and fully paid capital:
800,000 7% Preference Shares of $0.50 each: $500,000
15,000,000 $0.50 ordinary shares: $20,000,000

At 31 December Year 20, the directors of the company recommended a final dividend on the ordinary shares of $0.02 per share. Calculate the proposed dividend.

Solution:
Proposed dividend on Ordinary Shares = $0.02 * 15,000,000 shares = $300,000 (This amount will appear on the company's balance sheet as 'Current Liabilities' as well as in the profit and loss account)