Payout Ratio

Definition of 'Payout Ratio'

The proportion of earnings paid out as dividends to shareholders, typically expressed as a
percentage. The payout ratio can also be expressed as dividends paid out as a proportion of cash
flow. The payout ratio is a key financial metric used to determine the sustainability of a
companys dividend payments. A lower payout ratio is generally preferable to a higher payout
ratio, with a ratio greater than 100% indicating the company is paying out more in dividends
than it makes in net income.

The Payout Ratio is calculated as follows:

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

Also known as dividend payout ratio.

Investopedia explains 'Payout Ratio'

For example, Company X with earnings per share of $1 and dividends per share of $0.60 has a
payout ratio of 60%. Company Y with earnings per share of $2 and dividends per share of $1.50
has a payout ratio of 75%. Which company has the more sustainable payout ratio?

It really depends, since there is no single number that defines an appropriate payout ratio. The
adequacy of the payout ratio depends very much on the sector. Companies in defensive
industries such as utilities, pipelines, and telecommunications have stable and predictable
earnings and cash flows, and thus can support much higher payouts than cyclical companies.
Companies in cyclical sectors like resources and energy typically have lower payouts since their
earnings fluctuate considerably in line with the economic cycle.

In the previous example, if Company X is a commodity producer and Company Y is a regulated
utility, Ys dividend sustainability may be better than that of X, even though X has a lower
absolute payout ratio than Y.

Many companies set a target range for their payout ratios, and define them as a percentage of
sustainable earnings, or cash flow. The companies with the best long-term record of dividend
payments have stable payout ratios over many years. While many blue-chip companies increase
their dividends year after year, since they have steady earnings growth as well, their payout
ratios remain remarkably stable over extended periods.

Dividend Payout Ratio
Definition of 'Dividend Payout Ratio'

The percentage of earnings paid to shareholders in dividends.

Calculated as:


Remember:

- A reduction in dividends paid is looked poorly upon by investors, and the stock price usually
depreciates as investors seek other dividend-paying stocks.

- A stable dividend payout ratio indicates a solid dividend policy by the company's board of
directors.


Investopedia explains 'Dividend Payout Ratio'

The payout ratio provides an idea of how well earnings support the dividend payments. More
mature companies tend to have a higher payout ratio.

In the U.K. there is a similar ratio, which is known as dividend cover. It is calculated as
earnings per share divided by dividends per share