BT's dividend signal

In Topic 9 of the second edition of the book I took a look at the very important subject of dividend policy. In the introduction to this section I discused the clientele effect and the information that can be contained in the dividend announcement. A good example of these two factors in practice came along in last Friday's FT (page 20 Companies and Markets) with Andrew Parker discussing BT's latest figures which showed a 71% increase in pre-tax profits for 2010/11. However, of even more significance for their shareholders was the group's hint that dividend policy might be more generous in the future as a result of a sharp fall in their pension fund deficit. With the company generating £2.2bn of free cash flow it was able to raise the annual dividend by some 7% to 7.4p per share. This was contrasted with BT's decision to cut their dividend payouts two years ago due to lower than expected earnings and the need to increase the company's payments into the pension fund. It is now expected that the pension scheme is in far better financial shape and it is against this background that the company can now look to signal a more generous dividend policy in coming years. So if we take the dividend announcement as "an important signal to investors" BT is presenting an optimistic viewpoint.