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Feb 25, 2016

Six tips for announcing a dividend cut

How to break the bad news to investors

When Rolls-Royce announced that it would be cutting dividend payments for the first time in 25 years – by 50 percent, to 7.1p ($0.10) per share – it looked unlikely that investors would take the news well.

Just a few weeks on, however, and despite analysts predicting a 30 percent reduction, Rolls-Royce’s share price is now the healthiest it has been since November 2015. Commentators have suggested a number of reasons are at play, though many agree that unchanging guidance and a lack of any profit warnings are crucial elements.

John Dawson, Rolls-Royce’s director of IR, admits that cutting dividends is ‘never easy’. Brought in to head up the engine manufacturer’s IR team in July 2015, Dawson has since had to deal with a changeable stock that saw Rolls-Royce issue five profit warnings to investors across two years.

Dawson says changes to dividends are a significant event for investors, and disclosing them properly is crucial. ‘Understanding how investors see the dividend as a cash payment and an indicator of confidence or future performance is critical to making judgments about how to handle the issue,’ he explains.

Here are his top six tips for announcing dividend cuts.

1. Be upfront

Flag up any potential changes early and be proactive in reaching out. ‘If the circumstances of the business mean you’ll have to answer questions about the dividend, then be upfront with everyone and make it clear there is no certainty,’ Dawson advises. ‘You cannot say one thing and then announce another, while anything in between is price-sensitive.’

2. Consider the impact on different shareholders

‘Understand the register and the likely implications of a cut to your investors,’ suggests Dawson. An income investor, for example, will take the news differently from a growth-focused shareholder.

3. Be consistent with existing policy

Adhering to the wording of policies already in place is also important. ‘Look at all options and ensure your new wording copes with a range of outcomes,’ Dawson continues. ‘You don’t want two cuts in quick succession, or over any timeframe for that matter.’

4. Get management on board

When any cut becomes public, you need your chairman or CEO on the front line making the necessary calls. ‘Don’t rely on intermediaries to communicate for you,’ Dawson cautions.

5. Use external advisers – but be careful

Brokers and other advisers can be useful sounding boards but should be used in a controlled way. ‘They’re not always right and, if you know your investors well, your views are important,’ Dawson points out. ‘Plus, you know the sensitivities around future performance and need to keep options open.’

6. Keep on top of reporting

‘Bear in mind that once something is certain or highly like you may have a reporting issue,’ says Dawson. ‘Manage discussions accordingly as you develop your options.’