2. Dividend payout

In the context of dividend payments, analysts are generally interested in the dividend per share as well as the firm's dividend payout ratio.

 

DIVIDEND PER SHARE

Indicates how many dollars of dividend the firm distributes per share of common stock. Dividends are often paid on a regular basis, typically quarterly, semi-annually, or annually. 

Hershey, for example, pays quarterly dividends.  In 2015, the quarterly dividend was 53.5 cents for the first two quarters and 58.3 cents for the remaining two quarters. Hence, the total dividend per share of common stock was 2.24 dollars in 2015. This corresponds to an increase of 20 cents compared to the previous year.

Given that the firm had approximately 213 million shares of common stock outstanding, the firm's total dividend payment in 2015 was roughly USD 476 million.

 

DIVIDEND PAYOUT RATIO

The dividend payout ratio puts the total cash dividend in relation to the firm's net income. As we have already seen in our discussion of the financial statements, the net income reflects the amount of profit the firm generates for its shareholders. The dividend payout ratio indicates what fraction of that profit is paid out to shareholders (and, consequently, what fraction is retained in the company).

We can find the payout ratio either by dividend total cash dividends by net income or by dividing the dividend per share by the earnings per share.

 

Dividend payout ratio = \( \frac{\text{Cash dividends}}{\text{Net income}}\)

 

Dividend payout ratio = \( \frac{\text{Dividend per Share}}{\text{Earnings per Share}}\).

 

In the case of Hershey, we know from above that it has paid a dividend of USD 2.24 per share in 2015. From our discussion about profitability ratios, we also know that the firm's earnings per share (EPS) were 2.32 in 2015. Consequently, Hershey has paid out approximately 95% of its earnings to the shareholders in the form of dividends.

 

Dividend payout ratio = \( \frac{\text{Dividend per Share}}{\text{Earnings per Share}} = \frac{2.24}{2.32}\) ≈ 95%.

 

A high payout ratio is often an indication that the firm is relatively mature. It generates more cash from its operations than it can invest into new projects. Instead of storing that cash on the balance sheet or investing it in projects with unattractive prospects, well-governed firms often choose to return it to their providers of capital.