2

Vodafone (LSE:VOD) has been loss making and has negative retained earnings (Accumulated losses).

What are the accounting rules that allow Vodafone to pay a dividend - From the UK Government's website:

"A dividend is a payment a company can make to shareholders if it has made a profit. You cannot count dividends as business costs when you work out your Corporation Tax. Your company must not pay out more in dividends than its available profits from current and previous financial years."

A dividend is a payment a company can make to shareholders if it has made a profit. <---- That test is failed

Your company must not pay out more in dividends than its available profits from current and previous financial years.<--- And that one too, as there is an accumulated loss.

How it possible that VOD can legally pay a dividend?

4
  • Where are you getting that Vodafone has negative retained earnings? Yahoo finance is showing me they had $57B of equity as of Mar 31 2021 [58B as of Sept 30 2021]. Dec 14, 2021 at 18:51
  • Can you post a link to the UK website you quote? It's likely that the definition of "profit" that they use is not strictly "net income" but may exclude some losses that are contributing to the overall loss in the financials. It also may be different depending on the type of company (sole-proprietorship vs corporation, etc.)
    – D Stanley
    Dec 14, 2021 at 19:05
  • 1
    @Grade'Eh'Bacon Most of that is "additional paid-in capital". Their retained earnings (sum of all past net income/(loss)) is (120B).
    – D Stanley
    Dec 14, 2021 at 19:20
  • @DStanley Understood, thanks. I should have dug deeper. Dec 14, 2021 at 19:27

2 Answers 2

4

If and how much dividends a UK company can pay depends on the level of its distributable profits, not the net income or retained earnings shown in its financials reported to its shareholders. Not sure exactly what the biggest reasons are in Vodafone's case but it is quite possible that the accounting rules used in the preparation of financials reported to shareholders vs those used in calculation of the distributable profits such as those applying to depreciation schedules, consolidation of participations, and tax provision calculations are different to a significant extent.

So, I reckon, Vodafone still has positive distributable profits despite the negative or very low net profit and the negative retained earnings it has been posting in the last few years. Unfortunately, the UK companies are not required to disclose their distributable profits. See this article titled "Distributable Profits" by Deloitte, one of the largest tax advisory and auditing firms globally and in the UK, for more details.

5
  • Not required to disclose <---- The link you provide says: Dividends – or distributions to use the legal term –can be made only out of ‘profits available for distribution’ as shown in the ‘relevant accounts’ drawn up in accordance with the applicable UK law and accounting standards.
    – Cheetara
    Dec 16, 2021 at 12:26
  • Yes, exactiy. And the companies are not required to disclose those relevant accounts which are most probably significantly different from its financial accounts reported to investors in the case of Vodafone and I reckon for many other UK companies. The fact that they are prepared according to certain laws and regulations does not mean they have to be shared with the investors.
    – Alper
    Dec 16, 2021 at 14:01
  • I am surprised by this view and my understanding is that would be contrary to UK law. The shareholders own the business, not the directors who prepare this information. Why would there be a position where the directors hid this information form their owners?
    – Cheetara
    Dec 29, 2021 at 16:55
  • @Cheetara I don’t know which UK law(s) you are referring to and I am not a solicitor but shareholders are not entitled to know anything they like about a company in most jurisdictions if not all. In general, anyone working for or investing in a company needs to know only enough to perform his or her job properly or make a proper enough decision.
    – Alper
    Dec 30, 2021 at 3:39
  • However, I noticed that Vodafone, in addition to its consolidated financials, partially discloses a 2nd set of financials in its annual reports (no income or cash flow statements; only a balance sheet summary and a “statement of changes in equity”) available from its IR site. These appear to belong to the parent company’s stand-alone financials and might be the basis for dividend decisions with net profits and retained earnings in these being considerably better than those in its consolidated financials.
    – Alper
    Dec 30, 2021 at 3:44
2

The full rules may be too complex for this forum, but here's one piece that may explain Vodafone:

From ICAEW:

The rules apply to individual companies and do not treat a group as if it were a single entity. Rather, a parent company’s profits available for distribution are those resulting from its own activities and not those of its subsidiaries, save to the extent that those subsidiaries have made distributions to the parent company.

So it's plausible that some of Vodafone 40+ subsidiaries did qualify to pay a dividend, and those dividends are passed on to shareholders of the group, even if the group as a whole would not qualify.

It's also possible that the definition of "profit" for this law may be different than the definition used in the financials. There could be exclusions that could change if a company is profitable according to the law versus according to the "market". But given the number of subsidiaries, I find the pass-though of subsidiaries' dividends more plausible.

1
  • It's also possible that the definition of "profit" for this law may be different than the definition used in the financials. <--- That's largely my question, what is the definition? I'm looking for the definitive accounting here. If the rules are too complex for this forum, which forum should I be using?
    – Cheetara
    Dec 16, 2021 at 12:25

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.