# Dividend Payout Ratio

Dividend payout ratio is the percentage of a company’s earnings that it pays out to investors in the form of dividends. It is calculated by dividing dividends paid during a period by net earnings for that period.

Dividend payout ratio is reciprocal of retention ratio (or plowback period) which measures the percentage of earnings a company reinvests in projects to generate future growth.

Dividend payout ratio is an important indicator of a company’s performance from an investor’s point of view.

## Formula

 Dividend Payout Ratio = Dividends Paid = Dividend per Share Net Income Earnings per Share

## Analysis

People invest in a company expecting a return on their investment which comes from two sources: capital gains and dividends. The return from these two sources is inter-related. A high dividend payout ratio means that the company is reinvesting less earnings in future projects, which in turn means less capital gains in future periods. Similarly, low payout ratio today may result in higher capital gains in future.

Some investors prefer companies that provide high potential for capital gains while others prefer companies that pay high dividends. Dividend payout ratio helps each class of investors identify which companies to invest in.

Dividend payout ratio also provides an indication of a company’s future growth potential. For investors that are interested in high growth companies, a high dividend payout ratio may not be a good sign.

Dividend payout ratio should be analyzed in the context of industry and other ratios such as dividend yield ratio, P/E ratio, etc.

A more meaningful dividend analysis would also include analysis of any share buyback by a company. A share buyback is a way of returning cash to investors which involves purchase of own shares by companies. Such share buybacks increase share price of the company, which in turn results in capital gains for the shareholders.

## Example

Based on the information given below, calculate and analyze dividend payout ratio for Apple, Inc. and ExxonMobil Corp.

All amounts are USD in million.

 2011 2012 2013 2014 Apple (NYSE: AAPL) Dividends - 2,488 10,564 11,126 Net income 25,922 41,733 37,037 39,510 Cash and investments 25,952 29,129 40,590 25,158 ExxonMobil (NYSE:XOM) Dividends 9,020 10,092 10,875 11,568 Net income 41,060 44,880 32,580 32,520 Cash and investments 12,664 9,582 4,644 4,616

Solution

 Dividend Payout Ratio for AAPL for 2012 = $2,488 = 5.96%$41,733

The table below shows dividend payout ratios for AAPL and XOM from 2011 till 2014.

 Industry 2011 2012 2013 2014 AAPL Technology 0 5.96% 28.52% 28.16% XOM Oil and Gas 21.97% 22.49% 33.38% 35.57%

Apple, Inc. did not pay any dividends in 2011 because the management believed that higher return for investors can be achieved if the earnings generated are reinvested in projects that will generate future growth. This is supported by the company’s exceptional revenue growth in 2012. However, during the period from 2012 till 2014 the company’s cash pile was way above the level needed to avail the feasible new projects, so the management paid generous dividends in these years. However, in case of a technology company, high dividend payouts are an exception and not a rule.

ExxonMobil Corp. on the other hand is in a mature industry which it is expected to maintain a steady dividend payout and even increase it over periods. XOM payout ratio has hovered in the range of 23-36% in the four years which is pretty stable.

Written by Obaidullah Jan, ACA, CFAhire me at