Definition of Dividend Payment Ratio
Dividend Payment Ratio is the amount of dividend that the company gives out to its shareholders out of its current earnings. On the other hand, Retained Earnings are the amount of dividends that the company keeps after paying the dividends. Retained earnings are reinvested for earnings growth. In a word, the total parts of earnings are comprised as Dividends and Retained Earnings.
Formula of Dividend Payment Ratio?
The dividend payment can be calculated by using the following formula:
DPR = Dividend Per Share/Earnings Per Share x 100%
Or, DPR = Total Dividends/ Net Income x 100%
** Net Income = Profit after taxes – Dividends for preference shareholders.
Purpose of Dividend Payment Ratio (DPR)
DPR ratio is used to confirm whether the investment is made in a profitable company that has high growth potential. DPR also indicates the hidden intentions of the management. Sometimes, management may declare dividends to accelerate its share price. Again, excessively high dividends may affect the growth of the company.
Example of DPR
The earnings of XYZ Limited are as follows:
Profit before Interest & Taxes $ 300.00 Million
Less: Interest on Loan Stock $ (45.00) Million
Profit before Taxes $ 255.00 million
Less: Tax @ 21% $ (53.55) million
Earnings $ 201.45 million
Dividends – Preference Shares $ (16.00) Million
Dividends – Ordinary Shares $ (63.00) million
Retained Earnings $ 122.45 Million
** Total shares of XYZ is 85 million.
** Calculates Dividend Payment Ratio (DPR) from the above statement.
Net Earnings is = Earnings – Dividends for preferance shareholders = (201.45 – 16) Million = $ 185.45 million.
EPS = 185.45/85 = 2.18
DPS = 63/85 = .741
a) Earnings/Number of shares x 100 = 63/185.45 *100% = 33.97%
b) DPS/EPS x100% = .741/2.18 x 100 = 33.99%
The difference was created due to fractions.