Payout Ratio
Measures the share of earnings distributed to shareholders as dividends.
Formula
Payout Ratio = Dividend per Share / Earnings per Share x 100%
Worked exampleA $2.40 annual dividend divided by $4.00 EPS produces a 60% payout ratio.
Calculation steps
- Find annual dividend per share: $2.40.
- Find EPS for the same period: $4.00.
- Divide and multiply by 100 to get 60%.
How to interpret it
A lower ratio generally leaves more room for reinvestment and dividend protection, while a very high ratio may limit flexibility.
Industry context
REITs and other distribution structures use different definitions and may be better assessed with funds from operations or cash flow.
Common mistakes
- Match dividend and earnings periods.
- Do not rely on EPS when it is negative or distorted.
- Check cash payout ratios as a second view.