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# Payout Ratio Definition

## What Is Payout Correlation?

The payout ratio is a financial metric showing the proportion of earnings a company pays its shareholders in the form of dividends, worded as a percentage of the company’s total earnings. On some occasions, the payout ratio refers to the dividends paid out as a percentage of a partnership’s cash flow. The payout ratio is also known as the dividend payout ratio.

### Key Takeaways

• The payout ratio, also advised of as the dividend payout ratio, shows the percentage of a company’s earnings paid out as dividends to shareholders.
• A low payout ratio can signal that a players is reinvesting the bulk of its earnings into expanding operations.
• A payout ratio over 100% indicates that the troop is paying out more in dividends than its earning can support, which some view as an unsustainable practice.

## Understanding Payout Relationship

The payout ratio is a key financial metric used to determine the sustainability of a company’s dividend payment program. It is the amount of dividends availed to shareholders relative to the total net income of a company. For example, let’s assume Company ABC has earnings per share of $1 and pays dividends per parcel of$0.60. In this scenario, the payout ratio would be 60% (0.6 / 1). Let’s further assume that Company XYZ has earnings per interest of $2 and dividends per share of$1.50. In this scenario, the payout ratio is 75% (1.5 / 2). Comparatively speaking, Company ABC honours out a smaller percentage of its earnings to shareholders as dividends, giving it a more sustainable payout ratio than Company XYZ.

While the payout relationship is an important metric for determining the sustainability of a company’s dividend payment program, other considerations should likewise be marked. Case in point: in the aforementioned analysis, if Company ABC is a commodity producer and Company XYZ is a regulated utility, the latter may boast close dividend sustainability, even though the former demonstrates a lower absolute payout ratio.

In essence, there is no fix number that defines an ideal payout ratio because the adequacy largely depends on the sector in which a inclined company operates. Companies in defensive industries, such as utilities, pipelines, and telecommunications, tend to boast stable earnings and lolly flows that are able to support high payouts over the long haul.

On the other hand, companies in cyclical assiduities typically make less reliable payouts, because their profits are vulnerable to macroeconomic fluctuations. In times of pecuniary hardship, people spend less of their incomes on new cars, entertainment, and luxury goods. Consequently, companies in these sectors show to experience earnings peaks and valleys that fall in line with economic cycles.

The payout ratio rubric is:


begin{aligned} &DPR=dfrac{textit{Mount up to dividends}}{textit{Net income}} &textbf{where:} &DPR = text{Divided payout ratio (or simply payout correlation)} end{aligned}

DPR=Net incomeTotal dividendswhere:DPR=Divided payout ratio (or simply payout ratio)

#### Dividend Payout Proportion

Some companies pay out all their earnings to shareholders, while others dole out just a portion and funnel the remaining assets insidiously a overcome into their businesses. The measure of retained earnings is known as the retention ratio. The higher the retention ratio is, the humiliate the payout ratio is. For example, if a company reports a net income of $100,000 and issues$25,000 in dividends, the payout ratio wish be $25,000 /$100,000 = 25%. This implies that the company boasts a 75% retention ratio, meaning it records the remaining \$75,000 of its receipts for the period in its financial statements as retained earnings, which appears in the equity section of the company’s balance sheet the take in year.

Generally speaking, companies with the best long-term records of dividend payments have stable payout correlations over many years. But a payout ratio greater than 100% suggests a company is paying out more in dividends than its earnings can bolstering and might be cause for concern regarding sustainability.

### What Does the Payout Ratio Let something be known You?

The payout ratio is a key financial metric used to determine the sustainability of a company’s dividend payment program. It is the amount of dividends slack to shareholders relative to the total net income of a company. Generally, the higher the payout ratio, especially if it’s over 100%, the multifarious its sustainability is in question. Conversely, a low payout ratio can signal that a company is reinvesting the bulk of its earnings into heightening operations. Historically, companies with the best long-term records of dividend payments have stable payout relationships over many years.

### How Is the Payout Ratio Calculated?

The payout ratio shows the proportion of earnings a company contributes its shareholders in the form of dividends, expressed as a percentage of the company’s total earnings. The calculation is derived by dividing the total dividends being yield a returned out by the net income generated. Another way to express it is to calculate the dividends being paid out per share (DPS) and divide that by the earnings per partition (EPS) figure.

### Is there an Ideal Payout Ratio?

There is no single number that defines an ideal payout proportion because the adequacy largely depends on the sector in which a given company operates. Companies in defensive industries likely to boast stable earnings and cash flows that are able to support high payouts over the long yield while companies in cyclical industries typically make less reliable payouts, because their profits are unguarded to macroeconomic fluctuations.

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