What Dividends Are Paid From

Dividends are paid out of net profit — not the profit shown in the group's consolidated accounts, but the profit of the joint-stock company itself under Russian accounting standards, the amount left after tax and already fixed in approved financial statements. The law "On Joint-Stock Companies" names this source directly: Article 42 allows payment out of net profit, and, for preferred shares, also out of funds specifically set aside for that purpose. Everything else that is commonly taken for the source of a payout — revenue, operating cash flow, cash in the bank — is not the source. Hence the main surprise for the reader: a company with a profit may not pay, while a company with a loss may.

Prior-year profit is the same source

Net profit does not have to be the profit of the latest year. Retained earnings from prior years accumulate in equity, and the shareholders' meeting is entitled to distribute them instead of the result of the reporting period. This is exactly what explains payouts in a loss-making year: the loss reduces accumulated profit, but as long as that accumulated figure is positive, the legal source remains. The reverse situation also occurs — there is a profit, yet no payout decision is taken, because the board of directors recommended channelling it into development or debt repayment.

This should be checked not in a press release but in the balance sheet and the income statement — they are easiest to view in the issuer reports section, while declared decisions and dates are collected in the dividend calendar.

Profit is not cash

Net profit is calculated on an accrual basis: recognised revenue may not yet have been paid by the customer, and an asset revaluation or a foreign-exchange difference adds profit that is not backed by a single rouble of inflows. So the legal ability to pay and the physical capacity to pay are different things. The company takes the money for the payout from its cash balance, from undrawn credit lines, from asset sales. The gap between these two planes is what gives rise to everything listed below.

Dividends on borrowed money

When the declared amount exceeds free cash flow, the difference is covered with borrowed funds — debt-funded dividends. Legally it is flawless: the source remains net profit, and the loan merely supplies the cash. Economically it is a transfer: the debt and its servicing stay in the company after the payout has gone to shareholders. The sustainability of such a scheme can be read from the trend in the debt burden and from whether the practice is repeated year after year. Valuation multiples say little here on their own, but it is useful to keep them in view — for example, 3,78 for {{instrument:SBER}}.

A holding company pays out of what its subsidiaries have upstreamed

The parent company of a group often has almost no revenue of its own: the plants, banks and chains belong to subsidiaries. The holding company's profit in its Russian-standards accounts is formed mainly from dividends received from subsidiaries — dividends from subsidiaries. That means the payout at the top level depends on decisions at the lower level: until the subsidiary has declared and transferred its own dividends, the parent entity has no source. This creates a delay and adds forks in the road — the subsidiary's minority shareholders, regional restrictions, obligations under its own debt.

When paying is prohibited

Article 43 lists restrictions that apply regardless of whether there is a profit. A payout may not be declared if the charter capital has not been paid in full, if the company shows signs of insolvency or would show them as a result of the payout, or if the value of net assets is less than the sum of the charter capital and the reserve fund. Separately, it is prohibited to pay on ordinary shares until the size of the payout on preferred shares has been determined. That is why the wording "the board of directors has recommended" is not yet a payout: between the recommendation, the decision of the meeting and the actual transfer there remains room for cancellation.

Depositary receipts and interim payouts

If the security trades in the form of a depositary receipt, the source stays the same but the route of the money changes: the payout passes through the depositary bank, and its fees and currency conversion are added to it — dividends on depositary receipts. Payouts for a quarter or a half-year — interim dividends — are made out of the profit of the period and are therefore adjusted more often once the full-year results are in. And the amount reaches the account reduced by tax: the withholding mechanism is examined in the article on dividend tax, and the legal basis for the calculation is 13%.

What to look at before a payout

The sequence is short. Step 1: find retained earnings in the financial statements — is there a source at all. Step 2: compare the declared amount with cash flow — is there enough cash without new debt. Step 3: see whether the company runs up against the restrictions of Article 43. Step 4: check the structure — does the company pay with its own money or is it waiting for inflows from subsidiaries. The nearest declared payouts: {{dividend_calendar|limit=5}}.

What this article does not contain, and cannot contain, is a forecast of a specific amount. Dividend policy sets a benchmark, but the decision is taken by the shareholders' meeting, and the source of the payout is verified against the facts, not against a promise. For a security's profile and its payout history, see the stocks section and the dividend summary; unfamiliar concepts are explained in the glossary.