Ofwat issues guidance on dividend policy compliance

Ofwat has published guidance on the factors it expects to consider in assessing companies' compliance with the new dividend policy licence condition.

The guidance also sets out the factors it expects a company to take into account in justifying decisions about the level of dividends paid, and the disclosure it expects companies to provide in annual performance reports.

Since 17 May 2023, Condition P of companies' licences has required that any dividends declared or paid by companies are made in accordance with dividend policies that comply with a set of principles. These expect dividends to take account of a range of matters including service delivery for customers and the environment, current and future investment needs and financial resilience over the longer term.

Notable points in the guidance include:

• “each company should consider its performance in the round and over time, encompassing all aspects of delivery against its licence including delivery against its performance commitments, investment plans, cost efficiency and other areas of its operations”;

• “many companies are facing significant investment needs over the long term… for a company that is growing its RCV, investors may expect more of their return as growth in value of their investment rather than as cash dividends, particularly where there is a need to maintain gearing at reasonable levels”; and

• it is not sufficient for companies to justify or scale their dividend payments on the basis that a holding company in the group needs to meet specified interest costs or other holding company obligations. Dividend decisions are the responsibility of the board of the regulated business.”

Ofwat will report on dividend policy compliance as part of its review of annual performance reports. It said: “We will take action if we consider a company has not complied with the dividend licence condition.”