What Message Does the Dividend Per Share Send to Shareholders?

Dividends per share are calculated by dividing a company's annual dividend by the number of outstanding shares during 12 months. This method determines the appropriate distribution of a company's profits to its stockholders. A company's dividend payout ratio (DPS) can be an indicator of its profitability throughout a fiscal year and a window into its past and present financial health and stability for investors.

How Much Is the Dividend Per Share?

A company's dividend per share represents the total dividends it has declared and paid on its ordinary shares. Divide the total dividends paid out by the company, including interim payments, for a specific period by the total number of outstanding ordinary shares to get the dividend yield. The dividend paid in the most recent quarter is often used to determine a company's DPS and calculate dividend yield.

Understanding the Meaning of Dividends Per Share

Investors place a high value on dividend payout ratios (DPS) because the money a company gives back to its shareholders in the form of dividends is money the investor receives in return for owning shares of that company.

Additionally, a rising DPS over time may indicate that management has confidence in the sustainability of the company's profits growth. Say, for argument's sake, that last year ABC Company paid out 60 cents in DPS to its shareholders, but this year it doesn't pay any dividends.

Indicating the company's financial health is weak, and it may not be able to weather the current market environment. Therefore, if ABC's DPS were to decline, investors may decide to sell off their shares, further reducing the stock's market value. However, this does not always mean that the firm struggles financially if the dividend per share has decreased.

Share Dividend Examples

Increasing the dividend payout ratio is an excellent method for a firm to show its shareholders it is doing well. Companies with a strong track record of dividend payments typically have a history of consistent DPS growth, which is why many dividend-paying businesses place a premium on increasing their DPS. Coca-Cola, for instance, has increased its annual DPS every year since at least 1996 and has given a quarterly dividend since 1920.

Similarly, since declaring a $0.05 dividend distribution in March 1974, Walmart has increased its yearly cash dividend by the same amount. The retail behemoth has increased its dividend per share by at least 4 cents each since 2015, bringing it to $2.08 for Walmart's Fiscal Year 2019. 2

Why Do Investors Care About Dividend Per Share?

Investors place a premium on DPS because dividends are a guaranteed source of profit for the company's owners. It's the simplest way to estimate how much money you'll get as dividends from stock. Consistent dividend increases over time might reassure shareholders that the company's leadership is optimistic about its ability to maintain its profit growth.

How Does DPS Work?

Payouts for the whole year must be summed together for a fair calculation of DPS, including interim dividends. We factor in special dividends since they will not likely be paid again in the foreseeable future. Dividends given out during the interim period between calculating yearly earnings and distributing those earnings to shareholders are known as interim dividends. Earnings per share and the number of outstanding ordinary shares are determined by taking a weighted average of shares across the reporting period if common shares were issued during the computation period.

The Retention Rate: What Does It Mean?

The retention ratio, also known as the blowback ratio, measures the amount of profit that stays inside an organization. It refers to the percentage of net income kept to expand the firm rather than being given as dividends. The dividend payout ratio is the inverse of the payout ratio, which indicates how much of a company's earnings are distributed to shareholders.

The retained earnings ratio shows investors the proportion of profits being reinvested in the business. When a firm is still relatively young, it often reinvests a significant portion of its profits to fuel its rapid expansion, leading to a high retention rate.

Summary

The dividend payout ratio is one of the numerous financial ratios that consider dividend payments made by a company. With payout ratio defined as the percentage of profits distributed as dividends to shareholders, dividends per share may be computed by multiplying a company's payout ratio by its earnings per share. Earnings per share, calculated by dividing a company's net income by the total number of its outstanding shares, may usually be found on the income statement. On the other hand, the retention ratio indicates the number of a company's profits kept in-house rather than distributed to shareholders as dividends, thus the inverse of the payout ratio.