Dividends are an important source of income for many investors. Most investors use the dividends paid by a company as one of the key determinants in deciding whether a particular company is a worthwhile investment. In fact, one article published by FINRA reported that 84% of companies included in the S&P 500 index pay dividends.1 Because dividends are so important, every company that registers for an IPO with the SEC is required to disclose its dividend policy in its registration documents. Consequently, every registering company needs to understand what the SEC requires in these statements and whether offering a dividend is appropriate.
Unlike larger, well-established businesses, most newly registered companies do not plan on paying dividends in the near future. This is because investors generally associate the IPO market with potential growth through stock price appreciation rather than dividends. Thus, both investors and companies involved in IPOs generally focus less on dividends and more on future growth and the quality of the business model.
However, while many registering companies do not plan to pay dividends, there is a significant minority that do. The fact that some companies do pay dividends in the IPO market means that all companies should consider why this is the case to determine whether offering a dividend would make sense for their business. In order to explain each dividend strategy, this article will explore the SEC’s disclosure requirements and explain why companies do and do not offer dividends.
SEC Dividend Disclosure Requirements
Every registering company is required to file a Form S-1 with the SEC. The S-1 requires companies to provide information about themselves to potential investors. For more information about Form S-1, see our article about drafting an S-1. As stated in the investor bulletin published by the SEC, one of the required disclosures in the S-1 is for a company to “[describe] the company’s history of paying, and possibly its plans to pay, dividends to shareholders.” The SEC’s exact requirements for IPO dividend policy disclosures are included in the toggle below.2
17 CFR § 229.201 – (Item 201) Market price of and dividends on the registrant’s common equity and related stockholder matters.[…]
(2) Where registrants have a record of paying no cash dividends although earnings indicate an ability to do so, they are encouraged to consider the question of their intention to pay cash dividends in the foreseeable future and, if no such intention exists, to make a statement of that fact in the filing. Registrants which have a history of paying cash dividends also are encouraged to indicate whether they currently expect that comparable cash dividends will continue to be paid in the future and, if not, the nature of the change in the amount or rate of cash dividend payments.3
IPOs That Don’t Offer Dividends
The most common IPO dividend policy is to offer no dividends now or in the foreseeable future. Rather than try to offer returns to investors in terms of cash dividends, these companies tend to focus on growth in stock price as the primary driver of return on the investment. This strategy seems to make the most sense for typical registering companies, considering that one of the primary purposes of an IPO is to raise capital. Growth and expansion of a business is a cash and capital-intensive process, which is why many companies turn to equity markets as an efficient way to raise more capital. They need the capital to grow and are often cash flow negative. Because of this, it would not make sense for most registering companies to go through the effort of an IPO, only to then turn around and pay a portion of that new capital back in dividends. In most cases, long-term returns are likely going to be larger if the capital is used in other ways.
Because new registrants do not plan on offering dividends, most companies include dividend policies in their registration documents that are nearly identical in meaning. The two examples below are taken directly from the S-1’s of two companies that registered to go public. These examples illustrate the type of language used to indicate a “no dividend” policy in an S-1.
We intend to retain any future earnings and do not anticipate declaring or paying any cash dividends in the foreseeable future. The terms of certain of our outstanding debt instruments restrict our ability to pay dividends or make distributions, and we may enter into credit agreements or other borrowing arrangements in the future that may restrict our ability to declare or pay cash dividends or make distributions. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors our board of directors may deem relevant.4
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant. In addition, the terms of our revolving credit facility and our Convertible Notes contain restrictions on our ability to declare and pay cash dividends on our capital stock.5
IPOs That Do Offer Dividends
While most registering companies do not plan on offering a dividend, a small portion of these companies do. While the percentage of registering companies that plan to pay dividends is normally relatively low, around 25% or less, certain market conditions have at times driven the number close to 50% in some circumstances.6 In most cases, a higher number of dividend-offering IPOs is dependent on the types of companies going public.
While any company could hypothetically choose to offer dividends, there are several groups of firms that are more likely to offer dividends. One of the key reasons is the legal requirements that many companies face. For example, real estate investment trusts (REITs) and master limited partnerships (MLPs) are often required to offer dividends because of the legal requirements and corporate structures. Other companies may offer dividends in their registration statement for a variety of internal- or market-related reasons. Consequently, to understand the dividend policies of the companies that offer dividends in their registration statement, firms need to understand the legal requirements of REITs and MLPs, as well as the internal and external factors that might affect a firm’s policy decision.
Real Estate Investment Trusts
A real estate investment trust (REIT) is a company that owns or finances “income-producing real estate across a range of property sectors.”7 REIT IPOs are a specialized form of IPO that is placed under a different set of regulations and registration requirements than normal IPO companies. For example, REITs file a form S-11 instead of an S-1 when they register with the SEC. On the S-11, REITs will specify their “distribution policy”, which has the same purpose as the dividends statement in the S-1. More information about the SEC’s specific requirements for REIT statement can be found in item 508 of Regulation S-K (§229.508)8 or in our REIT IPOs article.
The various laws and regulations surrounding REIT IPOs require them to offer dividends. For instance, to maintain its legal status as a REIT, a company must make qualifying distributions that total at least 90% of its taxable income. This is done largely by paying distributions to shareholders, which are the equivalent of dividends. These regulations apply whether or not the company is public, but many of these companies choose to go public because it is a relatively cheap way to access large amounts of capital. By raising capital, a REIT is often better able to grow and fund its operations. The examples below include selections from the distribution statements made by REIT IPO companies that went public in 2021.
Following completion of this offering, we intend to make regular quarterly distributions to holders of our Common Stock (including our Class A Common Stock). Prior to May 2020, we have paid distributions to holders of shares of our Common Stock on a monthly basis. In light of the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic and then-current tenant rent relief requests, to preserve cash, strengthen our liquidity position, and manage our leverage profile, in May 2020 our board of directors determined that we would temporarily suspend our monthly distribution. We did not pay a distribution for the months of May, June, and July 2020. We reinstated our distribution in August 2020, announcing that we would transition to quarterly distribution payments, and announced that we intend to pay a $0.54 distribution per share (on a pre-stock split basis; $0.135 per share on a post-stock split basis) on our Common Stock (including our Class A Common Stock if outstanding on the record date for the distribution) for the third quarter with a record date of September 30, 2020, and a payment date of October 15, 2020. If this offering closes on or prior to September 30, 2020 and we pay the anticipated dividend on our Common Stock for the third quarter of 2020, holders of record of the Class A Common Stock as of September 30, 2020 will be entitled to such distribution together with holders of our Common Stock.[…] We currently expect that the per share amount of our quarterly distributions on our Common Stock following completion of this offering will be $0.25 on a post-stock split basis, compared to the $0.33 on a post-stock split basis (equivalent to $1.32 on a pre-stock split basis) paid in the aggregate on our Common Stock in the last three months that we paid distributions prior to the suspension. On an annualized basis, this would be $1.00 per share, or an annualized distribution rate of approximately 5.6% based on the mid-point of the price range set forth on the front cover of this prospectus and on a post-stock split basis. We estimate that this initial annual distribution rate will represent approximately 84.1% of our estimated cash available for distribution to stockholders for the twelve months ending June 30, 2021, based on the mid-point of the price range set forth on the front cover of this prospectus. We do not intend to reduce the annualized distribution per share if the underwriters exercise their option to purchase additional shares. Our intended initial annual distribution rate has been established based on our estimate of cash available for distribution for the twelve months ending June 30, 2021, which we have calculated based on adjustments to our pro forma net income for the twelve months ended June 30, 2020. […]9
We intend to make a pro rata distribution with respect to the period commencing upon the completion of this offering and ending on September 30, 2020, based on an initial distribution rate of $0.20 per share of common stock for a full quarter. On an annualized basis, this would be $0.80 per share of common stock, or an annualized distribution rate of approximately 4.0% based on the mid-point of the price range set forth on the front cover of this prospectus. We estimate that this initial annual distribution rate will represent approximately 103.2% of our estimated cash available for distribution for the twelve months ending on June 30, 2021. We do not intend to reduce the annualized distribution per share of common stock if the underwriters exercise their option to purchase additional shares. Our intended initial annual distribution rate has been established based on our estimate of cash available for distribution for the twelve months ending June 30, 2021, which we have calculated based on adjustments to our pro forma net loss for the twelve months ended June 30, 2020. This estimate was based on our historical operating results and does not take into account our long-term business and growth strategies, nor does it take into account any unanticipated expenditures we may have to make or any financings for such expenditures. In estimating our cash available for distribution for the twelve months ending June 30, 2021, we have made certain assumptions as reflected in the table and footnotes below.10 […]
Master Limited Partnerships
Another unique type of equity is a master limited partnership (MLP). MLPs are structured very differently than normal corporations that register to go public; however, they can still be publicly traded. Because of the differences in structure, the terminology used in the case of MLPs is different from traditional equity investments. For example, owners of equity are referred to as holders (not shareholders) and the payments made to holders are called distributions (not dividends). This investment class is unique in many ways, including that holders are considered legal partners in the firm. Because of this, most of the partnership agreements within the firm require the company to distribute all available cash generated by the business. Thus, while there is no governmental law or regulatory requirement imposed on the company, most are still contractually obligated to pay distributions.
Like REITs, the registration regulations placed on MLPs are different than those of regular IPO companies. Thus, the dividend policy statements tend to be much longer and contain much more detail about the company’s future plans for dividend payments. The example below, while still not including everything from the company’s statement, illustrates the level of detail that MLPs are expected to report in their registration statements.
Our Cash Distribution Policy
The board of directors of our general partner will adopt a cash distribution policy pursuant to which we intend to distribute at least the minimum quarterly distribution of $0.2625 per unit ($1.05 per unit on an annualized basis) on all of our units to the extent we have sufficient cash after the establishment of cash reserves (including Estimated Total Maintenance Spend) and the payment of our expenses, including payments to our general partner and its affiliates. We expect that if we are successful in executing our business strategy, we will grow our business in a steady and sustainable manner and distribute to our unitholders a portion of any increase in our cash available for distribution resulting from such growth.[…]
The board of directors of our general partner may change our distribution policy at any time and from time to time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis.[…]
Our Minimum Quarterly Distribution
Upon completion of this offering, our partnership agreement will provide for a minimum quarterly distribution of $0.2625 per unit for each whole quarter, or $1.05 per unit on an annualized basis. The payment of the full minimum quarterly distribution on all of the common units and subordinated units to be outstanding after completion of this offering would require us to have cash available for distribution of approximately $27.5 million per quarter, or $110.0 million per year. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” The table below sets forth the amount of common units and subordinated units that will be outstanding immediately after this offering, assuming the underwriters do not exercise their option to purchase additional common units, and the cash available for distribution needed to pay the aggregate minimum quarterly distribution on all of such units for a single fiscal quarter and a four quarter period:11 […]
Other Dividend Paying Companies
Unlike those that pay dividends for legal reasons, many companies still offer dividends in their registration statement for a variety of internal and external reasons. In many cases the internal features of the company lead it to begin offering a regular dividend, whether or not the company is public. For instance, when as a company matures and develops stable cash flows and profitability, it is common for the firm to pay a dividend, whether or not it is public. Other factors can be influential as well, and many of those factors are included in our post-IPO payout initiation article.
A variety of external factors can cause a company to offer dividends in their registration statement as well. For example, when the stock market is cold and returns are low across the board, dividends are sometimes offered as an extra incentive for investors to buy IPO stocks. Normally, as the IPO market improves, and more growth companies are available for purchase, the number of dividend-offering IPOs go down. Most IPO investors are not looking for dividends, and will thus shift their focus elsewhere.
One further instance in which a company may choose to offer dividends is when the primary purpose of the IPO is not to raise capital. In these cases, the company does not need IPO capital to grow or achieve its goals. Instead, an IPO is primarily pursued as an avenue to provide liquidity for investors. Consequently, some companies choose a method of going public such as a direct listing. In these cases, the logic for avoiding dividends would differ, especially if the company has already been paying private dividends.
While it may not be the norm, any company can choose to offer a dividend based on its particular strategy. The example below comes from the S-1 filing of SeaWorld, which chose to offer a dividend to investors at the time of its IPO registration.
In 2011 and 2012, we paid special dividends of $110.1 million and $500.0 million, respectively, to our stockholders (net of required withholdings).
After completion of this offering, we intend to pay cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements and in any preferred stock, business prospects and other factors that our Board of Directors may deem relevant. We expect to pay a quarterly cash dividend on our common stock of $0.20 per share, or $0.80 per annum, commencing in the second quarter of 2013. The payment of such quarterly dividends and any future dividends will be at the discretion of our Board of Directors.
Our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization, agreements of our subsidiaries or covenants under any existing and future outstanding indebtedness we or our subsidiaries incur.12 […]
Conclusion and Key Takeaways
While most IPO companies don’t offer dividends, a minority still do. By understanding why these companies offer dividends, companies considering an IPO can determine whether they ought to offer a dividend as part of their IPO strategy. In most cases, companies will want to signal to the investor market that they are focused on growth and future success. This is done by not offering dividends for foreseeable future. However, in some cases, when a company wants to send a different signal, attract investors to a non-rapid growth company, or comply with laws and industry norms, then offering dividends may be the correct course of action.
- Nariet: “REIT Capital Offerings.” Accessed 15 Apr 2021.
- Securities and Exchange Commission: “Industry Guides.” Accessed 15 Apr 2021.
- Latham & Watkins: “US IPO Guide.” 2020 Edition. Accessed 15 Apr 2021.
- Gandel, Stephen. Fortune: “The IPO market’s hottest craze: Dividends.” 15 Apr 2013.
- Thomas, Brad. Forbes: “A Critical Look At REIT IPOs.” 24 Jul 2019.
- Nariet: “What’s a REIT (Real Estate Investment Trust)?” Accessed 15 Apr 2021
- Morrison Forrester (MoFo): “MoFo’s Quick Guide to REIT IPOs.” Accessed 15 Apr 2021
- Latham & Watkins LLP: “Master Limited Partnerships – 101.” Accessed 15 Apr 2021.
- Ciura, Bob. Sure Dividend: “2021 MLP List | All 98 Publicly Traded Master Limited Partnerships.” 14 Apr 2021. Accessed 15 Apr 2021.
- FINRA: “How Companies Use Their Cash: Dividends.” 11 Nov 2015.
- SEC Office of Investor Education and Advocacy: “Investor Bulletin Investing in an IPO.” Accessed 1 Jun 2021.
- SEC Regulation S-K 17 CFR § 229.201.
- Airbnb Inc. 16 Nov 2020 Form S-1. Page 112.
- DoorDash Inc. 12 Dec 2020 Form S-1/A. Page 90.
- Gandel, Stephen. Fortune: “The IPO market’s hottest craze: Dividends.” 15 Apr 2013.
- Nariet: “What’s a REIT (Real Estate Investment Trust)?” Accessed 15 Apr 2021.
- SEC Regulation S-K. 17 CFR § 229.508 – (Item 508) Plan of distribution.
- Broadstone Net Lease, Inc. 8 Sep 2020. Form S-11/A. Pages 72-73.
- Netstreit Corp. 5 Aug 2020. Form S-11/A. Pages 65-66.
- BP Midstream Partners LP. 16 Oct 2017. Form S-1/A. Pages 71-73
- SeaWorld Entertainment, Inc. 18 Apr 2013. Form S-1/A. Page 37.