27 March 2020

In a series of studies, Ronan Gallagher and Professor Seth Armitage analysed how UK firms returned cash to shareholders during the period from 1993 to 2017.
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The Business School's Venture Fund provided funding of £5,544 which was used to recruit a research assistant to help with the data collection on this large empirical project.


Publically listed companies have three primary cash distribution channels at their disposal:

  • They can pay a regular dividend
  • They can make special (extraordinary) dividend payments
  • They can repurchase shares

A significant body of literature has documented major changes in the relative importance of these payout channels to companies over the last 40 years. Since the early 1980s, share repurchases have grown dramatically in the US, with more recent growth in other countries. Regular dividends have grown in total amount, but the proportion of listed companies that pay a dividend has declined.

It is argued that regular dividends have become less flexible and less responsive to earnings in the US and UK. The consensus view in the literature is that repurchases are gradually replacing regular dividends as the dominant payout channel. While the bulk of empirical evidence is US-focused, several studies argue that the evolution of payout policy internationally is broadly similar.

The UK is an interesting comparator to the US for several reasons. Both nations have similar equity market development, investor protection, and disclosure requirements. However, there are also some interesting distinctions pertaining to the propensity to pay special dividends, the level of institutional ownership of outstanding shares, and structural changes to taxation and executive remuneration practice.

Our Studies

In the first study, we documented an evolution of UK payout policy which contrasts to the US experience in three key aspects. First, regular dividends remain the dominant payout channel. A much higher proportion of UK than US companies pay regular dividends, and unexplained non-payment is lower. Second, regular dividends are more flexible in the UK than in the US, and special dividends further enhance dividend flexibility. There is no tendency for regular dividends to become smoothed (in response to volatile earnings) over time. Third, repurchases become an important method of payout by the 2000s, and total payout becomes more flexible. But repurchases do not usurp or alter the role of regular dividends. Flexible payouts augment rather than replace dividends in the UK. This first study is currently under journal review.

In a second ongoing study, we examine possible explanations for the greater importance of regular and special dividends in the UK. Among the potential explanatory factors are a more dividend-friendly tax regime in the UK (at least until 1997), greater institutional demand for UK dividends and lower executive remuneration-related incentives to repurchase shares (in order to make earnings per share-related targets or increase the value of near vesting options). The second study is currently under construction.

Conclusions So Far

Our work to date has uncovered other interesting topics meriting further exploration. How do companies choose between special dividends and repurchases when making non-regular payouts? Why did UK companies not make more use of special dividends to enhance flexibility before the growth of share repurchases? Why does the propensity to pay regular dividends (holding firm characteristics constant) increase in the 2010s? We look forward to examining these issues in further work and thank the School's Venture Fund for helping us shed light on key issues in UK payout policy.