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Focus on dividend proposals in annual report

For many investors, dividend plan is a crucial information besides earnings per share.

There are two ways to choose profit distribution, one is to distribute cash, and the other is to send dividend shares. The cash distribution is easy to understand, while dividend shares are actually an adjustment between accounting accounts, not involving cash outflow.

The transfer of Additional Paid-In Capital to the public stock does not belong to the category of dividends because the essence of this behavior is similar to the dividend shares. It is generally regarded as a kind of dividends. Therefore, in the annual report of listed companies, the profit distribution plan and the capital surplus transfer plan are reported together. As for the plan of transferring surplus to capital, although it is feasible in theory, it is rarely implemented by listed companies.

Prerequisites of profit distribution

There are two prerequisites for the board of directors of a listed company to propose a profit distribution plan in the annual report.

First, the net profit of the current year is still positive after making up for the losses of previous years. In reality, some listed companies have suffered huge losses in previous years, which caused the "undistributed profits" account in their books to be negative. According to the regulations, the net profit of the listed company in the current year, before distribution, must first make up for previous years' losses. If the undistributed profit is still negative after making up, the listed company cannot make a profit distribution.

Therefore, the "undistributed profits" still have huge losses of the listed company, investors do not need to expect the annual report will appear in the profit distribution plan.

Here to remind investors to pay special attention to: before the implementation of the latest "Company Law", listed companies can use the capital reserve to make up previous losses. Most listed companies have more than sufficient capital reserves. However, the latest Company Law prohibits the use of capital reserves to make up for previous years' losses. As a result, once the listed company's books form a huge loss, it is likely that within a few years, the company is difficult to propose a dividend plan.

Second, the current year's profit. Although theoretically, it is still possible for a listed company with a current year loss to distribute profits - as long as the undistributed profits of previous years and current year losses are still positive when added together. However, in reality, it is extremely rare to see a listed company to do so. In the last decade, there is no more than 5 cases. Therefore, for those listed companies whose annual reports have been predicted losses, investors do not need to expect the launch of the profit distribution plan.

The prerequisites of capital surplus conversion

Theoretically, there are no two prerequisites for the capital surplus to be transferred to share capital as there is for-profit distribution. In other words, regardless of whether the listed company is making money or not, the undistributed profit of the listed company is exactly negative. If there is enough money in the company's capital surplus accounting account, the capital surplus transfer plan can be proposed.

However, in practice, the majority of listed companies' boards of directors still follow the two prerequisites of profit distribution when deciding whether to propose a capital surplus increase plan. Some years ago, there were some loss-making companies in the annual report to put forward capital surplus to increase the plan. But now, this phenomenon is basically extinct.

Most of the companies with large cash dividends are healthy

Cash dividends from listed companies are an important form of realizing investors' return on investment.

On the first hand, most investors feel that investing income in secondary market is far more than cash dividends. On the other hand, few listed companies can adhere to a sustained and stable cash dividend policy. Most can not set a model on dividend distribution. But actually, receiving cash is not a bad thing.

Most publicly traded companies that able to give away large amounts of cash are healthy. Some companies seem to make a lot of money, but a lot of them are accounts receivable.The actual cash on the books is not much, and sometimes, the receivables end up becoming bad debts. Therefore, the ability to give away large amounts of cash indicates that the listed company is not at a big business risk and is unlikely to suffer a sudden loss.

The fact that a listed company distributes large amounts of cash also shows that it is truly responsible to its investors. If there has money on the company's account, the company may invest in an inferior project, save in the bank, or buy bonds. To prevent those, it is better to share cash to investors.

Moreover, investors get dividend incash, it is not the same as a dividend of the stock. And, if you really bullish on the company, you can use the cash and then buy its shares.

In addition, some experts also from years of practical analysis of the situation to draw such a conclusion: those who over the years to insist on a large number of cash dividends of listed companies have significantly higher return than the average market level.

Due to the importance of cash dividends to the healthy development of the stock market, the SFC introduced new regulations on cash dividends in October 2008. Firstly, the cumulative profit distributed in cash in the recent three years shall not be less than 30% of the average annual distributable profit realized in the most recent three years. This requirement makes strong cash dividends an important prerequisite for refinancing. As a result, it can be expected that many listed companies whose cash dividend ratios were too low in previous years are likely to introduce large proportions of cash dividend forecasts. 

Secondly, the SFC requires that, starting from the 2008 annual report, listed companies should disclose the ratio of the amount of cash dividends to the company's net profit in the previous three years in tabular form. It also requires that companies that make profits in their annual reports but do not propose a cash profit distribution plan should explain in detail the reasons for not paying dividends and the use of the funds not used for dividends retained in the company.

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