Dividend Payout Ratios and How They're Calculated
Dividends per share usually are paid to shareholders quarterly. These payments typically come out of a company's profits, but not always. Only a portion of profits are distributed, and the remainder stays with the company as retained earnings. The ratio of earnings paid to investors to net income is called the dividend payout ratio. It's calculated by dividing the company's dividends by its earnings:
Dividend payout ratio = Declared dividends ÷ Net income
Finding the Answer
A corporation's board of directors approves the dividend payment to investors each quarter. This amount is divided by the total number of shares outstanding, and the money is then distributed on a per-share basis to the company's investors. The "dividends per share" figure listed on a financial website, however, is almost always based on the payments over a company's fiscal year, which is the total of four quarterly payments. In principle, this figure is easily calculated. The dividend payouts for each quarter are added together and then divided by the total shares outstanding. The numerator is the total dividend payout; the denominator is the number of outstanding shares:
Dividends per share = Total dividends paid ÷ Total shares outstanding
In practice, the calculation can be a little more complicated.
If, for instance, a company has bought back some of its own shares in the second quarter, dividends per share after the buyback will be calculated with a different denominator than the dividend per share calculation prior to the buyback. In almost all cases, a company's annual report reflects all changes in the share numbers during the course of the year, and the relevant calculations are explained in the accompanying notes.
This being the case, investors infrequently do the calculation themselves. Everything you need to know, whether the total of dividends per share paid for the year or the breakdown by quarter, is already there in the 10-K report—the more detailed, SEC-required version of a company's annual report.
It's good to know how to do the necessary calculations by hand, but sometimes expediency is important. Some websites offer online calculators that allow users to plug in their information for a quick answer. When working with a lot of data or calculating ratios for multiple corporations, this can be a handy tool.
As an Analysis Tool
Investors generally use dividends as a signal. If dividends per share drop, investors may take that as a signal that the company is not doing well financially. An announcement of a larger dividend than anticipated, on the other hand, often results in an upward spike in the stock price. Unless qualified by other data, however, the dividends per share ratio is not always a reliable or useful analysis tool. For one thing, younger growth companies typically retain earnings at a higher ratio than established companies; it's a very efficient and low-cost way of increasing available funds for expansion, research, and acquisition.
To make the dividend per share analysis meaningful, other information related to dividends and earnings, such as the dividend to earnings ratio, should also be taken into account.