Established commands of the corporate finance are that the shareholders in more complex structures, where dividends have been paid in full in the past, are traditional in the expectations. This means that expect to receive regularly dividends in respect of their shares and that any increase to the dividends will reflect a long term engagement for a profitable and steady business. Observation done throughout work experience has shown that the fundamental expectations of the shareholders are still adopted but only firms that are confident of their stable growth and future, still consider the increase in their dividends.
One common and returning practice in the past years, is the buy-back of shares which is alternative payout mechanism, allowing the return of value to shareholders and do not come with attached with higher expectation in regards to future payouts. In UK, it is believed that this method has been “revived” due to the changes in the occurred in the taxation rules. Also, decrease of the past years in firms paying their shareholders’ dividends may also indicate the application of the buy-back method. Despite this, in the UK, this method has still not replaced the dividends since such cut or cancelled dividends were visible from data on bank’s dividend policies and procedures during the financial crisis, according to ‘Dividends and and Bank Capital in the Financial Crisis of 2007-2009, NBER Working Paper Series No. 16896 of 2012.
Until the 3rd Quarter of 2008, no slow-downs were recorded by the dividends payouts made by Bank of America and Citigroup. Strangely, in the 4th Quarter of 2008, Meryl Lynch almost doubled its dividends in comparison with the previous year and, Lehmans increased from $95 million to $118 million ion the 3rd quarter, just few month before its bankruptcy in September 2008.
In the European Union, temporary restrictions on dividends were we reimposed as conditions of the State Aid provided by the Member States to financial institutions affected by crisis and under arrangement supervised by the European Commission.
What Investors Expect?
Not paying dividends to shareholder is unappealing for investors that are looking for stable investment with steady revenue streams. Also, switching from dividends payout to share buy-backs can cause the shareholders to be locked into an increasingly unappealing investment. The Lloyds Banking Group were no exemption to this and the following statement was noted in its 2011 Annual Report and Accounts during the ban on dividends payments:
“We understand that the absence of dividends payments has created difficulties for many of our shareholders and we remain committed to recommending progressive dividends payments as soon as we are able to… Our Board is grateful for the support of our shareholders in 2011 and is very conscious that they – including most of our staff who themselves are shareholders – have suffered through the decline of the share price and the absence of a dividend.”
This book combines company law, capital market regulation and commercial law to give readers a detailed understanding of the legal and regulatory issues relating to corporate financial transactions. Informed by insights from the theoretical and empirical work of financial economists, the book examines, from a legal perspective, key elements of corporate financing structures and capital markets in the UK. The authors’ practical experience of transactions and regulatory issues ensures that thorough scholarly inquiry and critical reflection are complemented by an assured understanding of the interface between legal principles and rules as they are documented and in their actual operation.