The so-called payout ratio is a key figure from business administration. If you are an equity investor, you have probably already heard the term. In this article, you will learn more about the definition and meaning of the term and how the payout ratio can be used.
Payout Ratio Definition
Payout ratio means as much as "Payout ratio". Accordingly, the profit of a company or the free cash flow is shown in relation to the Dividendwhich is distributed.
This value is expressed as a percentage. The key figure is used by investors. They use the information to recognize what proportion of a group's profits is distributed to its shareholders.
Calculate payout ratio
It is important for the calculation that data from the same year is used. The dividend distribution and the Group's profit from the same year are compared with each other:
Payout ratio = dividend per share/earnings per share * 100
The corresponding values can be found in the income statement or balance sheet of the respective company. Investors can often freely view such documents as the cash flow statement.
The calculation is an approximation. The Earnings per share is a Average valuewhich is calculated from the individual values of a year. The dividend used for the calculation relates to a fixed day, namely the Ex-tag.
However, there are two options for this variant Alternativeswhich can be used to calculate the payout ratio. The second variant includes the total dividend and the free cash flow. The third variant uses the dividend total and the net income for the year. The formulas are as follows:
Payout ratio = total dividend / free cash flow * 100
Payout ratio = total dividend/annual net income * 100
Payout ratio interpretation
Investors have different investment strategies, so it is not possible to say whether a high payout ratio is fundamentally positive or negative:
- Some investors see a low payout ratio as positive, as it leaves room for a future increase in dividends
- Investors who pursue a dividend strategy prefer high payout ratios so that their own strategy works optimally
- If, on the other hand, you invest in growth stocks, you do not want dividend payments, as companies tend to reinvest profits in this way
This shows that it can often be better for corporations to retain excess profits and invest them in lucrative projects to invest. It is therefore not possible to formulate a general statement at this point. Whether a high payout ratio is advantageous or not depends on you as an investor.
In practice, there is often an intermediate route: often approx. 25 to 75 percent of profits are distributed to shareholders in the form of dividends and the remainder is invested in profitable projects and further growth.
In principle, the key figure can help to find out more about the Dividend policy of a company. Some companies attach great importance to dividends paid out. If, for example, profits fall but dividends remain constant, the payout ratio increases. In such cases, the group's reserves can be used.
This makes sense for some companies that have the status of so-called Dividend kings have. These are known for their high payout ratios and are popular with investors who pursue a dividend strategy. Corporations could resort to such measures in order to maintain their status as dividend kings and therefore offer constant payouts.
Conclusion: Payout ratio
The payout ratio is a Key business figure and indicates the ratio of company profit to the amount of the dividend payout. For investors in particular, the ratio can provide further information to help them decide whether a company or a specific share fits their own strategy or not.
In summary, it can be said that No fundamental statement It is not possible to determine whether a high or low payout ratio is positive or negative.
Are you interested as an investor in a Dividend strategycompanies with a high payout ratio have an advantage. If, on the other hand, you rely on Growth stocksa low ratio can be seen as positive, as such companies are more likely to use profits to invest in lucrative projects.