What's DPS? | How do you calculate it step-by-step? | What's "good"? | Real-life examples?
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.
For the company itself, declaring dividends and increasing DPS over time is a way to signal strong financial performance to the world.
In summary, these are the top 3 reasons why DPS is so frequently used by investors, shareholders and companies:
|Benefits & Uses of DPS|
|Shareholder||Shareholder value||Shareholders calculate DPS to arrive at the amount of per-share dividend income earned from a particular company for each share owned over a period of time.|
|Investor||Financial health||Investors calculate DPS to get an indication of a company’s profitability, financial stability and growth.|
|Quoted company||Performance signal||Publicly listed companies calculate DPS to share a portion of their profits with shareholders through a dividend issue as a signal of strength.|
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:
Dividend Per Share (DPS) =
Total Amount of Ordinary Dividends Declared
Total Number of Ordinary Shares Outstanding
Where the formula variables are defined as:
For companies that have a consistent dividend payout ratio, which means that they pay a consistent percentage of net profit as dividends, the DPS can be estimated based on their financial statements.
Which is equal to:
In this scenario, DPS can be calculated by multiplying a company’s payout ratio by its earnings per share, where:
The DPS itself is often used to calculate other dividend related metrics, such as the dividend yield, dividend cover, dividend payout ratio or the dividend discount model.
In order to calculate the dividend payment that a shareholder receives for each share held–Dividends Per Share (DPS)–follow these simple 3 steps:
|How to Calculate Dividends Per Share (DPS) in 3 Steps:|
|Formula #1: DPS = Dividends ÷ Shares|
|Step 1:||Total dividends||Sum up the total ordinary dividends issued by a company over a period of time|
|Step 2:||Total shares||Sum up the total outstanding ordinary shares issued by a company over a period of time|
|Step 3:||DPS||Divide the total dividend (1.) by the total shares (2.)|
|How to Calculate Dividends Per Share (DPS) in 3 Steps:|
|Formula #2: DPS = EPS x Dividend Payout Ratio|
|Step 1:||Payout ratio||Determine a company’s typical dividend payout ratio based on historical dividend payouts|
|Step 2:||EPS||Divide the net income (income statement) of a company by its number of outstanding shares (balance sheet)|
|Step 3:||DPS||Multiply the dividend payout ratio (1.) by the net income per share (2.)|
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?
|DPS Calculation - Step-by-Step - Example #1|
|Company X: Financial Results||Amount / Calculation|
|Total Net Earnings for the Fiscal Period||$2,000,000|
|Net Earnings Attributable to Common Shareholders||$1,000,000|
|Number of Shares Issued||50,000|
|>>> of which Treasury Shares||10,000|
|5-year Average Payout Ratio||50%|
|DPS = Dividends ÷ Shares||= $1,000,000 ÷ (50,000 – 10,000) = $25|
|Alternative: DPS = EPS x Dividend Payout Ratio||= [$2,000,000 ÷ (50,000 – 10,000)] x 50% = $25|
The dividend per share that the shareholders of Company X can expect to receive is $25.
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?
|DPS Calculation - Step-by-Step - Example #2|
|Company Y: Financial Results||Amount / Calculation|
|Total Net Earnings for the Fiscal Period||$1,200,000|
|>>> Interim Dividend||$200,000|
|>>> Special Dividend||$100,000|
|>>> Final Dividend||$900,000 = ($1,200,000 - $200,000 - $100,000)|
|Outstanding Shares – Opening Balance||50,000|
|Outstanding Shares – Closing Balance||60,000|
|Dividends for DPS = (Total Dividend – Special Dividend)||$1,100,000 = ($1,200,000 - $100,000)|
|Shares for DPS = (Average of Opening and Closing Balance)||55,000 = [(50,000 + 60,000) ÷ 2]|
|DPS = Dividends ÷ Shares||$20 = ($1,100,000 ÷ 55,000)|
The dividend per share of Company XYZ is $20.
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?
Let’s find out >>>
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:
The Dividend Per Share ratio suggests how profitable a company has been over a fiscal period. In other words, the company values its shareholders and has been able to generate enough surplus cash to reward them.
For some investors, dividends are the key reason to buy stocks. The shares represent an ownership stake in a company and the dividends are the owners’ share of the company’s profits. In fact, many investors enjoy a steady source of income from stocks held in dividend-paying companies.
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:
A DPS ratio with a downward trend does not necessarily mean that a company is in financial difficulties.
In fact, there are several valid reasons as to why companies do not issue dividends, such as:
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:
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:
What are the main benefits and disadvantages of the DPS ratio?
|Pros & Cons of Dividend per Share|
|Pros||Easy ratio to calculate and understand|
|Widely used in the investment community|
|Practical as the result directly translates into shareholder income|
|No indication of actual return on investment (the ratio does not take into account share price, such as original purchase price vs. current market price)|
|No indication of profit per share distributed versus earned (not distributed)|
|DPS vs EPS|
|Measure:||Measures the portion of a company's earnings paid out to shareholders for each outstanding share.||Measures net income generated per each outstanding share of a company.|
|Use:||Way for a company to signal financial performance and expectations to the market through dividend payouts.||Indicator of a company's profitability. Variable in determining share price.|
|Numerator:||Dividend Amount||Net Income|
|Calculation Formula:||Dividend Amount ÷ Outstanding Shares||Net Income ÷ Outstanding Shares|
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