Dividend Season – Dividends and Buybacks from an IR Perspective

Dividend season is here, and with it one of the year’s highlights for investors – as well as a critical part of the IR work for listed companies. In this article, we clarify what dividends actually signal, how listed companies should think about the level and frequency, when it is justified to refrain, and how share buybacks can be communicated as an alternative.

An Important Signal
Dividends play a central role in the relationship between a company and its investors. It is through dividends that investors receive a direct return on invested capital by sharing in the company’s profits. The dividend therefore also serves as compensation for the risk that arises when investors finance the company’s operations, for example by subscribing for shares in a new issue. For companies, the dividend has an additional important role as an indicator of the company’s financial health and future prospects.

A stable dividend history, ideally with a growing dividend, often acts as a quality stamp. It signals that the company generates actual and stable cash flow surpluses and possesses the ability to generate profit over time. This builds market confidence and attracts long-term investors, such as institutions and pension funds. Such recognition also frequently leads to a more stable share price and thus lower volatility, as well as greater opportunities to use the company’s shares as a means of payment in acquisitions.

Stable and recurring dividends also demonstrate that a company has a sound approach to capital allocation and discipline. When a company has no current investment opportunities – such as acquisitions or R&D – that yield higher returns than shareholders can achieve on their own, dividends are often seen as the most rational decision.

Research also indicates, contrary to what many believe, that companies with a higher dividend payout ratio have historically shown stronger future earnings growth. This can be interpreted as dividends functioning as a signal where management distributes capital when they are confident in the company’s future earning capacity, which simultaneously indicates strong underlying prospects.

For the individual investor, dividends are a crucial component of total return. When dividends are reinvested in new shares, a powerful compounding effect is created. Historical market data supports the importance of this, as the difference between reinvesting dividends and not doing so is significant over longer time horizons. In other words, dividends enable reinvestment that over time constitutes a significant part of the total return in a share portfolio.

Dividend Size and Frequency
The size of the dividend is a balancing act between the company’s long-term business objectives, investment opportunities, and market expectations. In many cases, it is not about distributing the entire year’s profit, but about establishing a sustainable level in relation to the company’s results, operating costs, and capital expenditures that can be maintained over time.

A clear policy on the payout ratio can serve as a compass for both management and investors. A well-communicated and established policy creates transparency and discipline in capital allocation. When designing the policy, future investment needs should be taken into account, ensuring there is a financial margin for foreseeable events, rather than locking in at too high a level.

To avoid unnecessary fluctuations, many companies apply what is known as dividend smoothing. This means that instead of raising or cutting the dividend based on a specific annual result, a long-term target is set based on the company’s sustainable earnings, with the ambition to adjust the dividend gradually towards this goal. In practice, this means refraining from raising the dividend dramatically in an exceptionally good year, in order to guarantee that the dividend is safe even when the business cycle turns.

This is particularly important because the market naturally tends to react strongly negatively to a dividend cut, while an increase does not have the same effect on the upside. If a company raises the dividend sharply in an exceptionally good individual year, this often creates an expectation of the payout level that is difficult to live up to, making the company more vulnerable to negative market reactions.

Dividend frequency can also matter. In Sweden, it is common to pay once a year in connection with the AGM in spring. In the US, quarterly dividends are the norm, and many British and Canadian companies pay semi-annually. The difference is cultural rather than legal – there is nothing preventing Swedish companies from paying more frequently, but tradition runs deep.

Dividend frequency has a direct impact on the share price. When a company pays once a year, the entire year’s dividend value is concentrated in a single event, creating a noticeable price drop on the ex-dividend date – the day the share trades without entitlement to the dividend. With quarterly dividends, this effect is spread across four smaller events, resulting in a smoother price development.
For companies wishing to attract a broader investor base, there are therefore good arguments for reviewing their dividend policy. Regular payments provide shareholders with a more predictable cash flow, which can be particularly attractive for certain investors, especially internationally.

Norwegian Equinor, listed on both Oslo Børs and the NYSE, is one of relatively few Nordic companies paying quarterly dividends. Equinor has a large proportion of US institutional investors and the dividend is declared in USD, which made the shift natural. The quarterly model has also given Equinor’s board the ability to adjust payments according to cash flow, which can be an advantage for companies strongly affected by external factors such as the oil price.

Share Buybacks – An Alternative for Returning Profits to Shareholders
A share buyback means that a company purchases its own shares from the market, effectively reducing the number of outstanding shares. This process is typically financed, just like dividend payments, with the company’s cash flow and functions as an alternative form of profit distribution to shareholders. Unlike a traditional dividend, where capital is paid out directly in cash, the value transfer occurs via the market through the company actively buying back shares.

By nature, buybacks affect earnings per share, total return, and share price development. When the number of outstanding shares decreases, the company’s profit is distributed across fewer shares, which mechanically increases earnings per share. This increase can in turn act as a driver for the share price. A buyback programme can signal that management views the share as undervalued, that investing in the company’s own cash flow currently outperforms other investment opportunities, and that it creates more shareholder value than a cash dividend. If the market agrees, this generally creates good momentum for the share price.

When a company conducts a buyback, it can handle the acquired shares in two ways. Either the shares are cancelled, meaning they permanently disappear from the market and the total number of outstanding shares decreases. In this scenario, existing shareholders’ stakes increase in value, as each remaining share now represents a larger portion of the company’s assets and future profits.

The second option is for the company to hold the shares in treasury. These shares are still issued but, under the Companies Act, carry neither voting rights nor dividends for as long as the company owns them. A common reason to hold shares in treasury is to use them for employee incentive programmes – for example when employees are allocated shares as compensation or choose to exercise their options. In this scenario, the buyback functions more as a tool for countering dilution, which is naturally appreciated by other shareholders and is a strong argument to highlight in communications to the market.

Communicating Buybacks
Cash dividends have traditionally been the primary method of returning company profits to shareholders in Sweden, while share buybacks have been considerably more common in, for example, the US due to differences in tax legislation. That said, many large Swedish companies have used buyback programmes as a complement to dividends, while American companies – especially in the tech sector – have rather used dividends as a complement. One example is Apple, which since 2013 has distributed approximately $150 billion to shareholders in dividends – a staggering sum, but one that pales in comparison to buybacks over the same period, estimated at $841 billion. These buybacks have reduced the number of outstanding shares from approximately 26.5 billion to 14.8 billion.

Worth noting is that when both Swedish and American companies communicate around buybacks, they tend to anchor the decision in a specific purpose, such as a technical delivery obligation, distribution of surplus liquidity, or ongoing capital optimisation, rather than framing it as a distribution of profit to shareholders’ benefit.

Some examples:

• Volvo Cars communicates buybacks with a technical and defined purpose: to secure the future delivery of shares to participants in Volvo Cars’ performance share and share matching programmes. By buying back shares ahead of programme activation, the company avoids new issuance, keeping existing shareholders’ stakes intact.
• H&M communicates buybacks as a surplus management tool: “The purpose of the buybacks is to distribute surplus liquidity and thereby adjust H&M’s capital structure by reducing equity.” According to the dividend policy, the ordinary dividend is the primary return channel, and buybacks are used when surplus is identified beyond that level.
• SEB communicates buybacks as an integrated part of capital management rather than a one-off tool. Programmes are described recurrently as conducted “as part of capital management”, which can be interpreted as the capital exceeding the internal capital buffer and the surplus being returned to shareholders without disrupting the ordinary dividend level.
• Google (Alphabet Inc) communicated, up until 2024, buybacks as the only return mechanism for a company that consistently prioritised reinvestment over dividends. When a dividend was later introduced in 2024, CFO Ruth Porat described it not as a shift but as an addition, with the foundation of capital allocation unchanged.

Suspended Dividends – Crisis or Opportunity?
Suspending or pausing a dividend is a decision that signals a shift in a company’s priorities or financial health. There are several underlying reasons why a board chooses to retain capital in the business rather than distributing it to shareholders. This may occur in times of extreme uncertainty, such as the 2008 financial crisis or the Covid-19 pandemic. During 2020, companies such as Boeing, Ford Motor, and Delta Air Lines paused their dividends to improve liquidity as production and travel ground to a halt. Similarly, major banks such as Citigroup and Bank of America were forced to cut their dividends to 1 cent per share during the 2008 financial crisis.

Another common reason for a suspended dividend is the need to prioritise the balance sheet. If a company has difficulties covering its interest costs, or if lenders have concerns about maintaining loan covenants, there may be requirements to reduce or eliminate the dividend entirely. In these situations, the creditor’s security takes precedence over the shareholder’s direct return in order to ensure the company’s survival.

There is no simple way to communicate a suspended dividend to the market, but a rule of thumb is to be transparent about the reason while also making clear what the plan going forward looks like. What measures have already been taken, or are expected to be taken. What may already be a crisis in the business also tends to become a confidence crisis if proactive communication around shareholder value creation is not maintained.

Suspending a dividend does not always have to signal a crisis, however – it can be a strategic decision to finance growth organically through investments in the company’s own operations or through acquisitions. Companies with high ambitions to expand may, for example, choose to retain cash on the balance sheet to obtain more favourable loan terms or simply to increase the proportion of expansion financed by the company’s own resources. Again, transparency and clarity lay the foundation for how best to convey the decision to the market.

In addition to financing, companies may also choose to suspend dividends in favour of share buybacks, for underlying strategic reasons such as:

• Undervaluation: If the company believes its own share is trading at a discounted price, buybacks may be seen as a more value-creating use of capital.
• Countering share dilution: To neutralise the effect of employee share option programmes, it is common to buy back a corresponding number of shares to keep the total number of shares constant.
• Optimising capital structure: Buybacks reduce equity and thus also the equity ratio. This in turn increases the company’s financial leverage, which can improve profitability measures such as return on equity and return on capital employed.

A current example of a company that has suspended its dividend in favour of other opportunities is the OMXS30 company Evolution AB which, despite a solid dividend history and an established dividend policy, announced that it would suspend its dividend in 2026. The company states that the board has assessed that a cash dividend is not the best way to create long-term shareholder value at this time. The news quickly prompted several analysts to react positively, as speculation about a larger share buyback appears to be a very attractive alternative for the company.

Evaluate the Alternatives and Always Consider Communication
In summary, the dividend decision and the choice between dividends and buybacks is a strategic balancing act where the company’s wellbeing is weighed against shareholder expectations. Factors such as the signalling value of dividends must be weighed against the benefits of share buybacks and capital structure management. Regardless of the decision, transparency around the company’s priorities is key to building a credible image with investors.

AVA Corporate Communications is a leading agency within financial communications and IR. We help listed companies convey their strategic messages. We create conditions for listed companies to gain a sound understanding of market expectations while ensuring that your communications reach their audience with the precision and transparency that builds confidence.

Sources

1. Arnot & Asness (2003). "Surprise! Higher Dividends = Higher Earnings Growth." Financial Analysts Journal, vol. 59, no. 1.

2. Bank of America (2009). Fourth quarter 2008 earnings report, filed with the SEC, January 2009.

3. Citigroup (2009). Fourth quarter 2008 earnings report, filed with the SEC, 20 January 2009.

4. Ibbotson & Chen (2003). "Long-Run Stock Return: Participating in the Real Economy." Financial Analysts Journal, vol. 59, no. 1.

5. Michaely, Thaler & Womack (1995). "Price Reactions to Dividend Initiations and Omissions." The Journal of Finance, vol. 50, no. 2.