Dividend per share (DPS) represents the sum of declared dividends issued by a company for every ordinary share outstanding. This metric is obtained by dividing the total dividends paid out by a business over a specific period, typically a year, by the number of outstanding ordinary shares.
Key Takeaways
- DPS represents the sum of declared dividends for each ordinary share outstanding.
- Calculated by dividing total dividends over a year by the number of ordinary shares.
- Important to investors as it translates directly to shareholder income.
- A growing DPS indicates a positive outlook on a company’s future earnings.
The Significance of DPS for Investors
DPS is crucial for investors because it directly equates to income received from holding shares in a company. An increasing DPS over time also suggests that a company’s earnings are sustainable, generating confidence in its management.
The DPS Formula
To calculate DPS, use the following formula:
1DPS = (D - SD) / S
Where:
- D = sum of dividends over a period (quarter or year)
- SD = special, one-time dividends in the period
- S = ordinary shares outstanding for the period
In this method, dividends over the entire year are aggregated, excluding special dividends. The total number of ordinary shares is averaged over the reporting period if new shares are issued during the year.
Example Calculation
Suppose Company ABC paid a total of $237,000 in dividends last year, including a special one-time dividend of $59,250. With 2 million shares outstanding, the DPS would be calculated as follows:
1DPS = ($237,000 - $59,250) / 2,000,000 = $0.09 per share
Additional Financial Metrics Related to DPS
Payout Ratio and Retention Ratio
The payout ratio is the proportion of earnings paid out as dividends, closely linked to DPS. Given the payout ratio and earnings per share (EPS), DPS can be determined by multiplying the payout ratio by EPS.
On the other hand, the retention ratio, or the plowback ratio, indicates the proportion of earnings retained in the business. This measures the amount reinvested for growth rather than paid out as dividends. Typically, newer companies have higher retention ratios.
The Dividend Discount Model
This metric underpins the concept that a stock’s intrinsic value can be estimated based on its future dividends. Most models in this context utilize the most recent PSC for their calculations.
Real-World Examples of DPS
Analysis of historical DPS trends often spotlights established corporations confident in their earnings growth. For instance:
- Coca-Cola: Consistent DPS growth since at least 1996 makes Coca-Cola a benchmark of reliability in dividend payments.
- Walmart: Since its first dividend in 1974, Walmart has steadily increased its annual cash dividend, highlighting robust financial health.
Conclusion
Understanding DPS is crucial for investors, as it offers insight into a company’s financial stability and potential for sustained income. Analyzing DPS alongside other financial metrics can provide a clearer picture of a firm’s future performance and risk profile.
By staying informed about DPS and other key metrics, investors can make more confident and strategic investment decisions.
Related Terms: Dividend Yield, Payout Ratio, Retention Ratio, Earnings Per Share.
References
- Macrotrends. “Coca-Cola - 56 Year Dividend History | KO”.
- Macrotrends. “Walmart - 31 Year Dividend History | WMT”.
