Payout Ratio Formula

What is the Payout Ratio Formula?

The payout Ratio formula calculates the amount announced as dividend to the shareholders out of the total earnings (after-tax profits) of the company. 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 earning of a particular period. The management, 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, decides whether to announce a dividend or not.

Payout-Ratio-Formula

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Key Terminologies  

Examples of Payout Ratio Formula (with Excel Template)

Now let us understand the examples of payout ratio formula.

You can download this Payout Ratio Formula Excel Template here – Payout Ratio Formula Excel Template

Payout Ratio Formula – Example #1

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

Solution

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

Payout Ratio Formula Example 1

The calculation of the dividend payout ratio is as follows,

Payout Ratio Formula Example 1.1
  • =$5/$20

The dividend Payout Ratio will be –

Payout Ratio Formula Example 1.2
  • = 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 shareholders of the company. The earning of the company for that particular period turns out to be $5,00,000. The total outstanding share at that point in time is 10,000. Find out the Dividend payout ratio from a total earning method and from the outstanding share method.

Solution

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

Payout Ratio Formula Example 2

The calculation of the earnings per share is as follows,

Example 2.1
  • =$500000/$10000

Earnings Per Share will be –

Payout Ratio Formula Example 2.2
  • Earnings Per Share = $50

The calculation of the dividend per share is as follows,

Example 2.3
  • =$100000/$10000

Dividend Per Share will be –

Example 2.4
  • Dividend Per Share = $10

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

Example 2.5
  • =$100000/$500000

Dividend Payout Ratio (Earning Method) will be –

Example 2.6
  • =20%

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

Example 2.7
  • =$10/$50

Dividend Payout Ratio (Earning Method) will be –

Example 2.8
  • =20%

Payout Ratio Formula – Example #3

Let’s assume that Visa Inc. has declared a dividend of $800,000 to the holder of the equity in the company. The net profit after tax posted by the company for that particular time is $22,00,000. The total outstanding share at that point in time is 40,000. Find out the Dividend payout ratio from the total earning method and from the outstanding share method.

Solution

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

Payout Ratio Formula Example 3

The calculation of the dividend per share is as follows,

Payout Ratio Formula Example 3.3
  • =$800,000/$40,000

Dividend Per Share will be –

Example 3.4
  • Dividend Per Share = $20

The calculation of the earning per share is as follows,

Example 3.5
  • =$2200000/$40000

Earning Per Share will be –

Payout Ratio Formula Example 3.6
  • Earning Per Share = $55

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

Payout Ratio Formula Example 3.7
  • =$20/$55

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

Example 3.8
  • Dividend Payout Ratio = 36%

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

Payout Ratio Formula Example 3.1
  • =$800000/$2200000

Dividend Payout Ratio (using earnings method) will be –

Payout Ratio Formula Example 3.2
  • Dividend Payout Ratio = 36%

Relevance and Uses of Dividend Payout Ratio Formula

As we can see, the dividend payout ratio is quite high, i.e., 36%, and it indicates 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 some 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:

  • If we are testing a growth-oriented company or the one which has substantial opportunities or expansion plans ahead, its usual that management would take a big pie of the earning in the company as that would help the companies to choose the expansion drive. If the administration is overseeing the expansion plan, it seems plausible to restrict dividend payout.
  • If the company is a mature one and stands at the level where it doesn’t foresee opportunities for the requirements of funds, 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.
  • Sometime, when a company which is engaged in consistent dividend payments turns out to be hoarding dividends for a period of time, then the company could face serious repercussions if they do not have a strong reason to back their move. Withdrawal of dividends has a direct impact on 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.

Recommended Articles

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

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