Dividends, payouts and stock returns in the United Kingdom

Abstract

The aim of this thesis is to investigate a number of different aspects of the dividend policy imposed by firms in the United Kingdom and the implications for shareholders.  Dividends, and in particular dividend reinvestment, have previously been shown to have contributed significantly to long-term equity returns with capital gains representing a relatively small component.  Recent evidence, however, from the United States has pointed to a considerable decline in the proportion of firms paying dividends.  This has implications for investors that require a history of dividend payments and thus who are now constrained in a smaller portion of the equity market.

This thesis reports that whilst there has been a decline in the percentage of firms making payments in the UK, this has been relatively modest compared to the US.  Furthermore, the total market payment has increased in real terms as a concentration of dividends has occurred amongst the largest payers.  The aggregate dividend payout ratio is also considered as a stand-alone investment tool.  Contrary to conventional wisdom, it is reported that a positive relationship exists between the payout ratio and future real earnings growth.  The remainder of the thesis studies factors that influence the dividend policy of individual firms and whether managers use this as a means of addressing informational asymmetries by signalling their expectations to investors.  It is found that the major factor in dividend setting is profitability, however, there is ‘stickiness’ observed that leads to current dividends being influenced by past payments.  There is only limited evidence presented of dividends conveying information regarding the future profitability of firms.

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