An Open Letter to the SEC About Companies That Pre-Announce Dividends

by: George Gutowski

An open question to the SEC:

Does declaring a dividend before an earnings announcement constitute an implied but ambiguous form of disclosure?

Dividends are typically paid from net earnings. Usually corporate directors adopt a dividend pay out policy, which is predicated upon the board's view of earnings. Consistent and or consistently increasing dividends are viewed as excellent indicators of corporate financial health, making ownership of a particular equity that much more desirable. Therefore, dividends as declared quarterly are an implicit form of guidance emanating from the Board of Directors.

Senior executives author official guidance and management comments contained within earnings releases, guidance statements as well as conference calls. The board may have been consulted or informed but responsibility lies with the senior officers. I do not believe that we have ever heard that there is a board buy in. Senior officers may speak to the dividend policy and dividend coverage and earnings payout ratios but it is ultimately the board’s responsibility to approve or not approve all dividends.

Several conundrums appear. A company may declare a dividend and then release poor and surprising results. Investors will feel ambushed, as they have found that they may no longer rely on the dividend as an indicator of financial health. At the other end of the scale, a dividend may be declared followed by superior results and a possibility of long-term improvement which had not been previously anticipated. The investor who relied on the dividend would not have had sufficient financial information. Various investor toxic scenarios may be constructed.

If dividends are declared and announced separately from earnings results, an arbitrage opportunity develops. Cash is fact and everything else is an opinion. Dividends are cold hard cash.

My suggestion is to require that all dividends be declared and announced at the same time as the quarterly earnings report. The board reviews the quarterly financials and is then in the best position to decide the dividend. By announcing earnings and declaring dividends in one consolidated announcement, you integrate board with management responsibilities thereby improving accountability to the investor, while reducing governance risk.

For more on this issue, see my recent piece Say It Ain't So: Moody's Corp. Announces Dividend Before Earnings Release.