payout ratio

payout ratio
Fin
an expression of the total dividends paid to shareholders as a percentage of a company’s net profit in a given period of time. This measures the likelihood of dividend payments being sustained, and is a useful indication of sustained profitability. The lower the ratio, the more secure the dividend, and the company’s future.
EXAMPLE
The payout ratio is calculated by dividing annual dividends paid on ordinary shares by earnings per share:
Annual dividend /earnings-per-share = payout ratio
     Take the company whose earnings per share is $8 and its dividend payout is 2.1. Its payout ratio would be:
2.1 /8 = 0.263 or 26.3%
     A high payout ratio clearly appeals to conservative investors seeking income. When coupled with weak or falling earnings, however, it could suggest an imminent dividend cut, or that the company is short-changing reinvestment to maintain its payout. A payout ratio above 75% is a warning. It suggests the company is failing to reinvest sufficient profits in its business, that the company’s earnings are faltering, or that it is trying to attract investors who otherwise would not be interested.

The ultimate business dictionary. 2015.

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