Interim dividends are announced before the end of the fiscal year and before publishing the end of the year financial statements.
Interim dividends are smaller as compared to final dividends and are often announced after the half-year financial results. Here is what you need to know about interim dividends.
What is an Interim Dividend?
An interim dividend is the profit distribution of a company to its shareholders during the fiscal year and before announcing the annual financial results.
A company can announce one or more interim dividends for its shareholders. The board of directors can decide to issue an interim dividend for various reasons.
This type of dividend is paid out of the retained earnings of a business. It is announced and delivered before the annual profits are declared through audited financial statements.
Declaring interim dividends is at the discretion of the board of directors of the company. Although the board proposes an interim dividend, the final approval comes from the shareholders.
The amount of an interim dividend and the subsequent dividend ratios are usually smaller than a final or regular dividend.
Interim dividends are often issued by companies that follow a consistent dividend policy and grow their dividends. The interim dividends can be issued semi-annually or quarterly.
Why Do Companies Pay Interim Dividends?
The foremost reason for issuing interim dividends during the fiscal year is to satisfy its shareholders.
A company can raise capital through debt and equity. Equity investors take more risks and expect a higher return on investments than debt investors.
Therefore, when a company has good earnings, it can distribute those earnings among its shareholders during the fiscal year through an interim dividend.
Like final dividends, a company lacking net positive value projects will also issue interim dividends. It means when a company has surplus cash, it may decide to distribute it among shareholders rather than retain it.
Another common reason for companies to issue interim dividends is to send positive signals to the market. Declaring an interim dividend suggests a company is enjoying a strong financial position.
Growing firms tend to retain profits for investments. Therefore, matured companies with accumulated retained earnings are more likely to announce interim dividends.
Who is Eligible for an Interim Dividend?
Like final dividends, shareholders who own the stock of the company before the ex-dividend date would be eligible to receive the interim dividend as well.
Companies paying dividends set a schedule. It includes the announcement date, the ex-dividend date, and the dividend payment date.
All shareholders that buy the stock before the ex-dividend date become eligible to receive interim or final dividends.
Interim Dividend Example
Interim dividends are declared as a percentage of the earnings or a dollar value on a per-share basis. Like final dividends, they are also distributed on a per-share basis to the shareholders.
For example, the mining company BHP announced an interim dividend of $ 1.5 for its shareholders after announcing a record half-year profit.
The BHP group declared revenue of $ 33.784 million and a massive cash flow of $ 8.5 billion for the first half.
The dividend announced by the BHP group is also significant considering its current share price is trading at $ 47.97.
Interim Dividend v Final Dividend – What are the Differences?
Both types of dividends are proposed by the board of directors and approved by the shareholders. However, there are a few key differences between both types.
Final dividends are announced after the financial statements have been audited and published. It means they are announced at the end of a fiscal year only.
Once approved, the final dividends cannot be canceled while the board has the authority to cancel the interim dividends.
Practically, interim dividends are smaller as compared to final dividends. This is because the management and the board of the company are still waiting for the results at the year-end.
As interim dividends are announced before the end of the fiscal year, they are paid out of the retained earnings or accumulated reserves. Contrarily, final dividends are paid out of the current year’s profits.
The board would need certain provisions in the article of association of the company to announce an interim dividend. A final dividend follows only the dividend policy of the company and doesn’t require provisions.
Interim vs Special Dividend
Special dividends are announced when a company achieves extraordinary financial results, either through its main operations or by spinning off one of the company's subsidiaries.
These are unplanned and non-recurring dividend announcements that companies make when they have significant cash surplus and profits.
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