What Is the Payout Ratio?

The payout ratio is a financial metric that shows the proportion of earnings a company pays its shareholders in the form of 澳洲幸运5官方开奖结果体彩网:dividends. It's expressed as a percentage of the company’s total earnings but it can refer to the dividends paid out as a percentage of a company’s cash flow in some cases. The payout ratio is also 🔴known as the dividend payout ratio.

Understanding the Payout Ratio

The payout ratio is a key financial metric that's used to 澳洲幸运5官方开奖结果体彩网:determine the sustainability of a company’s dividend payment program. It's the amount of dividends paid to shareholders relative to the total net income of a company.

The payout ratio is an important metric for determining the sustainability of a company’s dividend payment program but other factors should be considered as well. There's no single number that defines an ideal payout ratio because the adequacy largely depends on the sector in which a given company operates.

Companies in 澳洲幸运5官方开奖结果体彩网:defensive industries such as utilities, pipelines, and telecommunications tend to boast stable earnings and 澳洲幸运5官方开奖结果体彩网:cash flows that can support high payouts over the long haul. Income-driven investors have been advised to look for a ratio in the neighborhood of 60%, however. Even 35% to 55% is considered strong.

Companies in cyclical industries typ🎃ically make less reliable payouts because their profits are vulnerable to macroeconomic fluctuations.

Example of the Payout Ratio

Let’s assume Company A has earnings per share of $1 and pays dividends per sha𝐆re of $0.60. The payout ratio would be 60% (0.6 ÷ 1). Let’s further assume that Company Z has earnings per share of $2 and dividends per share of $1.50. The payout ratio is 75% (1.5 ÷ 2) in this scenario.

Company A pays out a smaller percentage of its earnings to shareholders as dividends, giving it a more 🐎sustainable payout ratio than Company Z.

Payout Ratio Formula

$\begin{aligned} &DPR=\dfrac{\textit{Total dividends}}{\textit{Net income}} \\ &\textbf{where:} \\ &DPR = \text{Divided payout ratio (or simply payout ratio)}\\ \end{aligned}$​DPR=Net incomeTotal dividends​where:DPR=Divided payout 🧜ratio (or simply payout ratio)​

Some companies pay ♋out all their earnings to shareholders. Others dole out just a portion and funnel the remaining assets back into൩ their businesses. The measure of retained earnings is known as the retention ratio. The higher the retention ratio, the lower the payout ratio.

The payout ratio would be $25,000 ÷ $100,000 = 25% if a company reports a net income of $100,000 and issues $25,000 in dividends. This implies that the company boasts a 75% retention ratio. It records the remaining $75,000 of its income for the period in its financial statements as retained earnings. This appears in the equity section of the company’s balance sheet the following year.

Companies with the best long-term records of dividend payments generally have stable payout ratios over many years. But a payout ratio greater than 100% suggests that a company is paying out more in dividends than its earnings can support. This might be cause for concern regarding sustainability.

The Bottom Line

The payout ratio is a financial metric that shows the proportion of earnings a company pays its shareholders in the form of dividends. It's expressed as a percentage of the company’s total earnings and is also known as the dividend payout ratio. It's key in determining the sustainability of a company’s dividend payment program.