Payout Ratio: Definition, Formula and Explanation

Not logged in, please login to view portfolio!

Key Takeaways

The payout ratio is calculated by dividing Dividends per share (DPS) by Earnings per Share (EPS)
It shows the proportion of earnings that the company pays to its shareholders in the form of dividends

What is Payout Ratio?

The payout (or dividend payout) ratio shows the proportion of earnings that the company pays to its shareholders in the form of dividends. It is expressed as a percentage of the company’s total earnings. Alternately, it may also be expressed as dividends paid out as a percentage of the company’s cash flow.

Calculating Payout Ratios

It is usually expressed as a percentage and is calculated as follows:

Payout Ratio = Dividends per Share (DPS ) / Earnings per Share (EPS)

If a company’s Earnings per Share came out to be of $15 and Dividends per share to be of $5, then its payout ratio would be 33%.

Understanding Payout Ratio

It is difficult to define an ideal payout ratio because this is largely dependent on the industry that the given company operates in. For example, companies operating in industries such as telecommunications and utilities tend to be able to support larger payout over a longer period of time whereas companies operating in cyclical industries such as travel and constructions have less reliable payouts due to their dependence on favorable macroeconomic factors.

Older companies are more likely to offer higher payouts as they are established and have the capacity to share more of their earnings with their shareholders. In comparison to this, newer companies will have lower payout ratios because they need to retain more of their earnings so that they may invest more in their business to ensure growth. However, companies with lower payout ratios have the potential to increase their dividend payment over time as this would be ensured by their business growth which they are working towards in the present.

It is important to note that if a company’s payout ratio is above 100%, it indicates that the company is paying more money to investors than it is taking in. This is an unrealistic approach and is not very sustainable as a result of this, dividend payments may go down over time. Companies with strong dividend payment record are more likely to have the stable payout ratios over time. Thus, from an investors point of view, the payout ratios can help determine whether or not the companies can maintain paying dividends to its shareholders in the long run.

About Us

Financial literacy is your key to success and a promise of a secure future in turbulent times. We offer you the right education and resources you need to achieve your financial dreams. Sarmaaya is a trusted source of research and information about Forex, Mutual Funds, and Stocks. Our widgets, tools and calculators aid in identifying potential investment opportunities and valuable insights that can help achieve your short and long-term financial goals.

Social Links

Important Links

Disclaimer

Sarmaaya Financials Private Limited is a Pakistan Stock Exchange (PSX) authorized data redistributor. Sarmaaya & CS Solutions (Pvt.) Limited (CS) do not guarantee the timeliness, accurateness, or completeness of any data or information on the website. Sarmaaya & CS makes no warranties, express or implied, as to Sarmaaya & CS or any data or values relating thereto or results to be obtained therefrom, and expressly disclaims all warranties of merchantability and fitness for a particular purpose with respect thereto. To the maximum extent allowed by law, Sarmaaya & CS, its licensors, and their respective employees, contractors, agents, suppliers and vendors shall have no liability or responsibility whatsoever for any injury or damages – whether direct, indirect, consequential, incidental, punitive or otherwise – arising in connection with Sarmaaya & CS or any data or values relating thereto – whether arising from their negligence or otherwise. Nothing in the website shall constitute or be construed as an offering of financial instruments or as investment advice or investment recommendations (i.e., recommendations as to whether or not to “buy”, “sell”, “hold”, or to enter or not to enter into any other transaction involving any specific interest or interests) by Sarmaaya & CS or a recommendation as to an investment or other strategy by Sarmaaya & CS. Data and other information available via the website should not be considered as information sufficient upon which to base an investment decision.