What is the Payout Ratio Formula?

The payout Ratio formula calculates the amount announced as a dividend to the shareholders out of the company’s total earnings (after-tax profits). There are three ways to calculate the dividend payout ratio formula depending upon the availability of particular data –

Dividend Payout Ratio (using Earning Method)= Total Dividend Paid / Total Earning

Dividend Payout Ratio (using Outstanding Method) = Dividend Per Share (DPS) / Earning Per Share

Dividend Payout Ratio = ( 1 – Retention Ratio )

The dividend payout ratio formula demonstrates the company’s intention to partake in the earnings of a particular period. After observing factors such as upcoming projects or uses of funds (if withheld ) in the business for expansion policies or to boost the company’s reserves, the management decides whether to announce a dividend.

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Key Terminologies  

  • Dividend = It is a reward from the company’s earnings to the shareholders of the company. The dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more mostly paid in cash could also be paid in kinds, such as a share of stock or part or property rights. Though shareholders approve the dividend, the company’s management decides in the first place to announce it. It is not mandatory to announce it and depends upon the decision of the management of the company. Apart from companies, various mutual funds exchange-traded funds also pay dividends.Dividend Per Share (DPS) = The total dividend amount divided by outstanding shares of the companyOutstanding Shares Of The CompanyOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more is known as dividend per shareDividend Per ShareDividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held.read more. Earnings = the profit ( after-tax profits) earned by the company over a particular period (generally quart https://www.wallstreetmojo.com/earnings-per-share-eps/-annually, yearly). Earnings Per ShareEarnings Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company’s performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more (EPS) = the profit ( after-tax profits) earned by the company over a particular period (generally quart https://www.wallstreetmojo.com/earnings-per-share-eps/-annually, yearly).Retention RatioRetention RatioRetention ratio indicates the percentage of a company’s earnings which is not paid out as dividends but credited back as retained earnings. This ratio highlights how much of the profit is being retained as profits towards the development of the firm.read more = is the percentage of profit a company decides to keep in the business (after paying off the dividends) to use it for expansion or other purposes. It is the opposite of the dividend payout ratio and the remaining portion of the dividend payout ratio (1- dividend payout ratio). The profits left after the dividend payment are transferred to the Retained EarningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more.

Examples of Payout Ratio Formula (with Excel Template)

Now let us understand the examples of payout ratio formula.

Payout Ratio Formula – Example #1

As per recent data, XYZ Inc. has reported a dividend per share (DPS) of $5 per share and an earning per share (EPS) of $20 per share. First, calculate the Dividend Payout Ratio.

Solution

Use the below-given data for calculation of the payout ratio.

The calculation of the dividend payout ratio is as follows,

  • =$5/$20

The dividend Payout Ratio will be –

  • = 25%

It indicates that out of $20 of earning per share, the management has decided to pay shareholders 25% of the earnings. Thus the dividend payout ratioDividend Payout RatioThe dividend payout ratio is the ratio between the total amount of dividends paid (preferred and normal dividend) to the company’s net income. Formula = Dividends/Net Incomeread more turns out to be 25%.

Payout Ratio Formula – Example #2

A company has recently announced a dividend of $100,000 to the company’s shareholders. The company’s earnings for that particular period turned out to be $5,00,000. The total outstanding share then is 10,000. Find out the Dividend payout ratio from a total earning method and the outstanding share method.

The calculation of the earnings per share is as follows,

  • =$500000/$10000

Earnings Per Share will be –

  • Earnings Per Share = $50

The calculation of the dividend per share is as follows,

  • =$100000/$10000

Dividend Per Share will be –

  • Dividend Per Share = $10

The calculation of the dividend payout ratio (using the earning method) is as follows,

  • =$100000/$500000

Dividend Payout Ratio (Earning Method) will be –

  • =20%

The calculation of the dividend payout ratio (using outstanding shares method) is as follows,

  • =$10/$50

Payout Ratio Formula – Example #3

Let’s assume that Visa Inc. has declared a dividendDeclared A DividendDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.read more of $800,000 to the company’s equity holder. The net profit after tax posted by the company for that particular time is $22,00,000. The total outstanding share now is 40,000. Find out the Dividend payout ratio from the total earning method and the outstanding share method.

  • =$800,000/$40,000

  • Dividend Per Share = $20

The calculation of the earning per share is as follows,

  • =$2200000/$40000

Earning Per Share will be –

  • Earning Per Share = $55

Calculation of dividend payout ratio (using outstanding shares method) is as follows,

  • =$20/$55

Dividend Payout Ratio (using outstanding shares method) will be –

  • Dividend Payout Ratio = 36%

Calculation of dividend payout ratio (using the earning method) is as follows,

  • =$800000/$2200000

Dividend Payout Ratio (using earnings method) will be –

Relevance and Uses of Dividend Payout Ratio Formula

As we can see, the dividend payout ratio is quite high, i.e., 36%, indicating that the company either has earned very good profits or doesn’t expect any investment plans in the future. Thus paying a dividend at a higher rate.

The ratio on its own does not specify any relevant information. It stands for the company’s intention and practices of announcing a dividend over time. There is no guarantee that the payout percentage paid in the current year will be followed in the future too. To get a clear picture of the intention and visibility of dividends, we need to see this ratio in some context. Some of those insights are mentioned below:

  • Suppose we are testing a growth-oriented company with substantial opportunities or expansion plans ahead. In that case, it’s usual that management would take a big pie of the earnings in the company as that would help the companies to choose the expansion drive. If the administration oversees the expansion plan, it seems plausible to restrict dividend payout.If the company is mature and stands at the level where it doesn’t foresee opportunities for the fund’s requirements, it could pay off the dividends to the shareholders. It also happens when the earning at which a company could earn turns out to be lower than the market rate; then, it is better to transfer the extra or unused funds to the shareholders.Sometimes, when a company engaged in consistent dividend payments turns out to be hoarding dividends for some time, the company could face serious repercussions if they do not have a strong reason to back their move. Withdrawal of dividends directly impacts share price, and most of the time, to maintain the level of a stock price, the company keeps paying a dividend even from its past reserves.

This article has been a guide to the Payout Ratio Formula. Here we discuss calculating dividend payout ratio using various methods and practical examples, and a downloadable excel template. You can learn more about financial analysis from the following articles –

  • Horizontal Analysis FormulaInflation FormulaTypes of Dividend PolicyTypes Of Dividend PolicyA Dividend Policy is a business strategy that deals with the amount of dividend to be paid & the frequency of payment. It has 4 major types, i.e., Regular Dividend, Stable Dividend, Irregular Dividend, & No Dividend Policy. read moreCompare – Dividends Ex-Date vs. Record DateCompare - Dividends Ex-Date Vs. Record DateThe dividend ex-date is the deadline for an investor to complete his purchase of the underlying stock in order to receive a dividend payment. On the other hand, top management determines the record date, which is the date on which the investor’s name must appear in the company’s books.read more