Companies need finance to continue their operations. This finance usually comes from two sources, including debt and equity. Companies obtain debt finance from third parties.
Similarly, they pay regular interest at a specific rate in exchange for these funds. Debt finance costs less compared to other finance sources. However, they may be more challenging to obtain at times.
The other finance source, which is often more prevalent, is equity finance. It represents the capital raised through a company’s shareholders.
Usually, equity finance is easier to obtain, although it comes at a higher cost. The most crucial cost associated with this finance is paying dividends in perpetuity. There are several types of this distribution that companies may make, including final and interim dividends.
What are Dividends?
Dividends refer to the percentage of a company’s earnings that it distributes among shareholders. This distribution comes from the profits that companies generate from their operations. Similarly, it is the earnings that companies distribute instead of holding for future use. In other words, dividends are profits given to shareholders before transferring the residual amount to retained earnings.
Dividends are one of the most prominent costs when it comes to equity finance. Since this finance lasts for a lifetime, it results in the perpetual distribution of profits among shareholders.
Therefore, companies have to distribute dividends until they wind up or repay the equity. These dividends also represent a type of return that shareholders get from investing in companies.
Several factors may impact a company’s dividends and distribution. The most critical of these is a company’s historical payments.
Through these payments, companies may create an expectation among investors for similar distributions. Similarly, a company’s retention ratio or dividend payout ratio will also play a substantial role in the process. Future projects or finance needed for operations will also impact these dividends.
In essence, dividends represent the compensation that shareholders get for investing in the company. Through these payments, companies can encourage existing shareholders and attract new investors.
Companies announce these dividends after reporting their financial performance for an accounting period. The announcement usually results in a proportional increase or decrease in the company’s stock price.
Overall, dividends refer to the income that shareholders get from investing in a company. Most companies distribute these dividends in cash.
However, it may also involve stock sometimes. Similarly, there are several types of dividends that companies may pay their shareholders. These may include final and interim dividends. Both of these differ from each other in various regards.
What is a Final Dividend?
Companies usually pay dividends after they become sure of their financial performance. Usually, the process for these dividends involves the management deciding on the dividends to give shareholders. After that, they go to the board for approval. The board approves this amount, and the company later pays its shareholders. Usually, the approval process occurs during the annual general meeting.
A final dividend is a dividend that companies declare at the annual general meeting for a specific accounting period. This amount depends on the company’s financial performance or earnings.
Companies calculate this dividend after accounting for year-end financial results and recording them. After perceiving a company’s profits and financial health, directors can decide what these dividends should be.
The critical factor in differentiating final dividends is the decision coming after the issuance of financial statements. The final dividend depends substantially on financial performance.
These dividends are likely to be higher than the interim dividends that companies declare or pay. Usually, final dividends include well-informed decisions while keeping the company’s cash reserves and financial health in view.
A final dividend payment is a fixed amount per share of a company’s ordinary stock. When companies hold the annual general meeting, they also announce this figure to the public.
Final dividends usually include cash dividends rather than shares. The amount that companies pay as these dividends is more predictable based on their historical distributions.
Overall, final dividends come after companies announce their financial results. This term is more common in some areas than others.
In some cases, the term final dividend can also refer to the distribution of a company’s retained earnings after liquidation. However, it is more commonly known as liquidating dividends. The final dividend that companies pay significantly depends on their dividend policy.
How Does a Final Dividend work?
A final dividend can be a specific amount that companies pay after each accounting period. This period may be quarterly, semiannually, or annually.
Most commonly, companies pay final dividends after each quarter. Usually, companies calculate these dividends as a percentage of earnings after accounting for capital expenditures and working capital.
Final dividends depend on the company’s management and board of directors. As mentioned, the process begins after the management becomes aware of the company’s financial performance.
Once the figures are known, it can make well-informed decisions on how much the final dividend should be. However, the management does not have the final say in finalizing the distribution of profits.
Once a company’s management decides on the value of final dividends, it will present it to the board for approval. The board will usually approve the management’s decision unless there is some critical issue with those amounts.
However, the board is the ultimate authority when it comes to finalizing these dividends. The board also dictates a company’s dividend policy which impacts the management decisions.
Final dividends come after a company reports its financial results and audits those results. This feature differentiates final dividends from interim dividends. For most companies, these dividends will be the only type they pay their shareholders. Usually, they come at fixed and predictable intervals with forecastable figures.
What is the difference between Final Dividends and Interim Dividends?
The primary difference between final dividends and interim dividends is the time of announcement. Final dividends come after a company announces its financial statements.
Similarly, these dividends occur after the company’s annual general meeting. These two factors are crucial in deciding the final dividends that shareholders will receive.
Interim dividends are different as they come before the annual general meeting. Similarly, the financial statements that accompany these dividends usually include unaudited performance.
In some instances, companies may not rely on the financial results to distribute interim dividends. Similarly, interim dividends come from a company’s retained earnings since the earnings are not determinable.
In most cases, final dividends come directly from a company’s profits or earnings. As mentioned, interim dividends generate from retained earnings. In some cases, final dividends may also take a part of its retained earnings.
However, those instances are rare. Interim dividends may also come when companies make losses during an accounting period. Since the management does not know of the financial results, they may make this decision without knowledge.
Overall, interim dividends do not rely on a company’s financial performance. Similarly, it does not require the occurrence of the annual general meeting.
For these reasons, interim dividends are usually lower than final dividends. Once companies approve the final dividends, they cannot withdraw those dividends. However, interim dividends can get canceled after shareholders agree to do so.
Conclusion
Dividends involve the distribution of profits or retained earnings among shareholders. Similarly, there are several types of these distributions that companies may make.
One of these includes final dividends that come after a company’s annual general meeting. Companies usually make final dividends from their profits, which is different from interim dividends. Similarly, these dividends rely on a company’s financial performance.
