The dividend payout ratio represents the total amount of dividends that a company distributes to its shareholders in relation to its net income. In simpler terms, it’s the percentage of a company’s earnings paid to shareholders as dividends. The remainder of the earnings is retained within the company to pay off debts or reinvest in core operations. This financial metric is often just called the payout ratio.
Key Takeaways
- The dividend payout ratio is the proportion of earnings paid to shareholders as dividends.
- Companies may pay out all their earnings, some of their earnings, or none at all as dividends.
- The portion of earnings not paid as dividends is called the retention ratio.
- Interpreting the dividend payout ratio requires considering the company’s maturity and growth potential.
Calculating the Dividend Payout Ratio: Formula and Methods
The dividend payout ratio is calculated using the formula:
Dividend Payout Ratio = \frac{Dividends Paid}{Net Income}
Alternatively, it can also be expressed as:
Dividend Payout Ratio = 1 - \mathrm{Retention Ratio}
The retention ratio, expressed per share, can be calculated as:
Retention Ratio = \frac{EPS - DPS}{EPS} \quad \mathrm{where:}
\begin{cases}
EPS = \mathrm{Earnings \ per \ Share}\
DPS = \mathrm{Dividends \ per \ Share}
\end{cases}
Excel Calculation Example
If you have the sum of annual dividends and outstanding shares, you can compute the $\mathrm{Dividends \ per \ Share (DPS)}$. Suppose a company paid $5 million in dividends last year with five million shares outstanding. In Microsoft Excel:
- Enter Dividends per Share into cell A1.
- Enter =5000000/5000000 in cell B1, resulting in $1 per share.
- Enter Earnings per Share into cell A2.
Suppose the company had a net income of $50 million last year. Using the formula for earnings per share: $EPS = \frac{Net Income - Dividends \ on \ Preferred \ Stock}{Shares \ Outstanding}$, enter:
- Enter =(50000000 - 5000000)/5000000 into cell B2, giving an EPS of $9.
- Enter Payout Ratio into cell A3, followed by =B1/B2 into cell B3, giving a payout ratio of 11.11%.
Understanding the Dividend Payout Ratio
A company’s payout ratio can range from 0% (no dividends) to 100% (all earnings paid as dividends). The maturity level of a company influences how much it distributes:
- New, growth-focused companies often have low or zero payout ratios as they reinvest most of their earnings.
- Older, established companies usually distribute consistent dividends.
For instance, in 2012, after almost twenty years of not paying dividends, Apple (AAPL) started issuing dividends. The CEO decided it was time to reward shareholders given the company’s strong cash flow.
Assessing Dividend Sustainability
The payout ratio helps measure a dividend’s sustainability. Companies avoid cutting dividends as it negatively impacts stock prices and management’s reputation. An unsustainably high payout ratio, typically over 100%, may indicate potential dividend cuts.
Long-term trends in the payout ratio matter. A steady increase can signal a mature business, but a rapid spike may alert to unsustainability.
Industry-Specific Dividend Payouts
Dividend payouts vary by industry. For example, Real Estate Investment Trusts (REITs) must disburse at least 90% of earnings to enjoy tax exemptions. Companies may return value through share buybacks, complementing dividends for investors seeking long-term value growth.
Dividend Payout Ratio vs. Dividend Yield
While comparing these, remember the dividend yield shows the return on investment in dividend form, while the dividend payout ratio shows the percentage of net earnings paid as dividends.
The yield is calculated as:
Dividend Yield = \frac {Annual Dividends \ per \ Share}{Price \ per \ Share}
For instance, if a company paid $10 in annual dividends per share on a stock valued at $100 per share, the dividend yield is 10%.
Real-World Example: Apple’s Dividend Payout Ratio
On January 3, 2022, Apple’s trailing twelve months (TTM) dividend was $0.87 per share. Apple’s quarterly EPS was:
- Q1 2021: $1.70
- Q2 2021: $1.41
- Q3 2021: $1.31
- Q4 2021: $1.25
Apple’s TTM EPS was $5.67, resulting in a payout ratio of:
\frac{0.87}{5.67} \approx 15.3
t \
The Bottom Line
The dividend payout ratio is a critical metric in evaluating how companies reward their shareholders. By exposing the percentage of net earnings paid as dividends, this ratio helps investors understand a company’s maturity, profitability strategy, and dividend sustainability.
Related Terms: Net Income, Earnings per Share (EPS), Dividend Yield, Retention Ratio, Cash Flow.
References
- Apple. “Dividend History”.
- Apple. “Apple Announces Plans to Initiate Dividend and Share Repurchase Program”.
- U.S. Securities and Exchange Commission. “Investor Bulletin: Real Estate Investment Trusts (REITs)”, Page 1.
- Apple. “Condensed Consolidated Statements of Operations (Unaudited) Q1 2021”, Page 1.
- Apple. “Condensed Consolidated Statements of Operations (Unaudited) Q2 2021”, Page 1.
- Apple. “Condensed Consolidated Statements of Operations (Unaudited) Q3 2021”, Page 1.
- Apple. “Condensed Consolidated Statements of Operations (Unaudited) Q4 2021”, Page 1.
