Dividend Per Share (DPS) Ratio: Complete Guide | FinanceTuts (2024)

You’d use DPS to evaluate stocks to invest in, especially if you prefer companies that pay dividends.

Or if you already are a shareholder of a company and want to figure out how much of the overall dividend payout of a company you’re entitled to based on how many shares you own.

In summary, these are the top 3 reasons why DPS is so frequently used by investors, shareholders and companies:

But don’t be fooled, declining DPS–or no dividend at all–is not automatically a red flag signalling financial issues.

It could just simply be a sign of the company reinvesting funds into the business or avoiding confusing signalling to the market, which are both good things.

So, because DPS is such an important and widely used investor ratio, this article covers everything you need to know, including:

• 1.Formulas (Hint: there’s more than one!)
• 2.Step-by-step calculation (Explaining the tricky & confusing parts.)
• 3.Real-life examples
• 4.What’s a “good” DPS? High or low?
• 5.Pros & Cons
• 6.Bonus: DPS vs. EPS - What’s the difference?

Dividend Per Share (DPS) =

Total Amount of Ordinary Dividends Declared

÷

Total Number of Ordinary Shares Outstanding

• Exclude any special one-time dividends that are not part of a company’s standard dividend policy and payment cycle.

• Include all types of ordinary dividends declared throughout the period, including both interim (distributed throughout the year before total annual earnings are determined) and final (issued at the end of the year) dividend payments.

• The value of property dividends, stock dividends and other forms of dividend payment other than cash can be included as long as they are part of a company’s standard dividend policy.

• Dividends may be gross or net of tax, depending on whether a company is required to withhold tax on shareholder dividend income at source.

• Include only outstanding shares by excluding treasury stock that companies keep for themselves

• Include only primary ordinary common shares

• • If a company has issued different classes of shares, such as preferential shares, the DPS may be calculated separately for each class of stock.

• • If a company has more than one type of common stock, the DPS may be calculated for the primary share type, which is typically the one most actively traded in the market with the largest number of outstanding shares.

• Use either the number of shares outstanding at a certain date or an average over a specified period of time. Weighted average of shares is generally used in cases where the company issued common shares during the calculation period and/or the number of outstanding shares on the stock market fluctuated significantly during the calculation period.

• • You can simply average the number of shares outstanding at the beginning and the end of a period or calculate a more complex weighted average.

• Dividends and shares must be based on a the same time period, such as a fiscal year, financial year, quarter etc.

Dividend Per Share (DPS) =

Earnings Per Share (EPS)

x

Dividend Payout Ratio (DPR)

Dividend Per Share (DPS) =

(Net Income ÷ Total Number of Shares Outstanding)

x

Dividend Payout Ratio

In this scenario, DPS can be calculated by multiplying a company’s payout ratio by its earnings per share, where:

• Payout Ratio is the proportion of earnings paid out as dividends to shareholders
• Earnings per Share is equal to net income divided by the number of outstanding shares

This year, Company X has reported a net income of $2 million. For the same period, the company had 50,000 shares in issue, of which 10,000 is treasury stock.

Historically, Company X paid out 50% of earnings as dividends to its shareholders, none of which were special dividends. The company is not required to tax the dividend payments at source.

What dividend per share can the shareholders of Company X expect for that period?

Over the last year, Company Y attributed $1,200,000 of its net earnings to shareholders as a dividend, including an interim dividend of $200,000 and a special one-time dividend totalling $100,000.

While the company had 50,000 common shares outstanding at the beginning of the period, the ending outstanding stock increased to 60,000, because new common shares were issued during the year.

What is the DPS of Company XYZ for that year?

Paying out dividends to shareholders every year and continuously increasing the DPS is a way for a company to signal strong performance to the stock market.

For example, there is a group of stocks in the S&P 500 index called “Dividend Aristocrats”, which are companies that have raised their dividends for at least 25 consecutive years.

Corporations like Coca-Cola, Colgate-Palmolive, Target, Walgreens, McDonald’s and Walmart have all experienced more than 40 years of continuous dividend growth.

On the other hand, Google and Amazon have famously never declared a dividend, even though other tech giants like Microsoft, IBM, Oracle, Intel, Cisco and even Apple have all been paying out dividends to their shareholders.

So, what is better – high or low DPS?

The Dividend Per Share is more than just a calculation that determines how much shareholders of a company will get paid in dividends.

DPS is a widely used financial ratio, which helps investors assess the financial performance, health, stability, as well as long-term growth prospects and shareholder value of a company.

Generally speaking, the stronger the dividend payouts from a company, the more attractive the stocks are to investors, which may increase their market value.

But that’s not always the case. Here’s why >>>

Companies use dividends and DPS to:

1. Signal strong financial performance to date
2. Show confidence in future earnings
3. Share profits with existing shareholders through dividends
4. Attract dividend-seeking investors

Also, dividend payments that are consistent or even growing over time are typically associated with strong financial position, performance and stability. This translates into positive expectations of a company’s growth and future earnings.

Both the promise of a dividend payout and the perceived financial strength of a company can attract more investors, which in turn increases its market value and stock price.

Hence, most companies avoid dividend cuts unless their financial condition requires it or the business undergoes some significant change.

Consequently, a rising DPS is regarded as a positive sign of a company being confident that its earnings growth can be sustained to maintain or improve on the new level of dividend in the future.

Generally speaking, if a DPS ratio decreases or even disappears over time, it may indicate to the market that the financial health of a company could be deteriorating.

This in turn can lead to investors selling their stake in the company, driving the market value and stock price of the company down.

But here comes the twist:

In fact, there are several valid reasons as to why companies do not issue dividends, such as:

1. Reinvesting into business operations and growth to increase value of a company
2. Deleveraging to reduce the level of debt in a company
3. Paying out more substantial one-time special dividends rather than committing to a consistent annual dividend
4. Preventing wrong signalling by avoiding high dividend payouts even in particularly profitable years

A company may pay a smaller percentage of its net income to stockholders, or decide not to pay out a dividend at all, in the favour or reinvesting its residual profits back into the business.

This may lead to an increase in the value of the company due to the expansion, with the potential of a higher dividend in the future.

This approach is common among both mature and rapidly growing companies, for instance:

• High-growth startup: Reinvests all of its earnings into the business to fund further growth.
• Established corporation in a mature market: Reinvests all of its profits to fund a new project, develop a new product, purchase a new asset, enter a new market, or pursue an M&A (merger and acquisition) opportunity.

When a company reduces or eliminates its dividend policy, the market can regard it as a negative sign.

Here are 3 ways how companies overcome this problem:

1. Avoid High Dividend

Some companies maintain a stable–or only slowly increasing–DPS, by avoiding high dividend payouts even in particularly profitable years.

2. One-time Special Dividends

Similarly, companies that are doing well overall but their income fluctuates significantly between periods may prefer not to commit to consistent dividend payouts and increases.

Instead, they may choose to reward shareholders with one-time special dividends whenever the time is right, which then tend to be more substantial than a typical regular dividend.

3. No Dividends

Other companies do not issue dividends at all to avoid this problem completely.

In fact, some believe that dividends should not actually impact the price of a company stock. This is called dividend irrelevance theory.

Afterall, the investors can sell part of their stockholding if they are in need of cash.

In conclusion, the stock with the highest dividend payout is not always the best choice. There is a wide variety of factors that might influence the health of a company and its ability to distribute dividends to its shareholders.

Therefore, the DPS should be analyzed in conjunction with other financial metrics and non-financial factors to gain a holistic understanding of a company for the purpose of an investment.

The DPS ratio is often disclosed by companies themselves (e.g., in financial statements or investor materials), so it does not need to be calculated by investors and analysts.

While this may be convenient, make sure that you understand the basis on which the DPS was calculated (e.g., check the notes to financial statements), especially if you are comparing DPS of different companies against each other.

Examples of DPS calculation inputs to consider:

• Time period (e.g., quarterly, annual)
• Types of shares (e.g., primary/secondary common stock; preferential shares)
• Form of dividend payment (e.g., cash, stock, property)
• Shares issued (including treasury stock) or outstanding (excluding treasury stock)
• Cut-off point (e.g., number of shares at a specific point in time; weighted average over a period of time)
• Gross/net amount (i.e., pre/post tax)