Dividend Definitions – What is Dividends per Share?

Many investors use various key dividend definitions – such as dividends per share (DPS) – without a second thought about any deeper implications.

Even novice investors will know that dividends per share is the amount of dividend an equity distributes per each individual common share of stock. Dividends are a method that companies use to distribute a portion of their earnings as income payments to their stockholders.

While there are multiple ways to distribute dividends, cash dividends are the most common form of dividend distributions.

Dividends per Share Formula

Another dividend definition that plays an important role with the dividends per share concept is the dividend payout ratio. This ratio indicates what portion of its earnings a company distributes as dividend payouts to its shareholders.

This total payout amount for the entire year, divided by the number of outstanding common shares, is the dividend per share amount. Therefore, the formula to calculate dividends per share is:

Let us assume that the ABC Corporation has the following earnings:

Q1:       $1,500,000

Q2:       $2,500,000

Q3:       $2,250,000

Q4:       $1,750,000

      Total Earnings:       $8,000,000

If the ABC Corporation has 5,000,000 outstanding common shares, the dividends per share amount is $1.60 for the entire year.

While the formula and the calculation above might seem simple and straightforward, that is just the beginning. Therefore, before delving into distribution frequencies and what kind of dividend distributions figure into the dividends per share calculations, as well as the difference between trailing and forward dividends, let us review the origin of the earnings that are the main source of cash dividend payouts.

Corporate Earnings

Investors can find the two components necessary for the DPS calculation easily in publicly traded company’s financial statements. Specifically, the company’s total earnings appear on the company’s income statement and investors can find the number of a company’s outstanding common shares in the stockholders’ equity section of the balance sheet.

It is important to note that the dividend discussions and analysis generally revolves around dividend distributions on common shares of company stock. While preferred shares receive higher dividend distributions than common shares, the preferred share dividends are calculated on the share’s par value, which is fixed. Therefore, while enjoying the fixed nature of their dividends at times when earnings decline, holders of preferred shares do not get the benefits of rising dividend payouts as the company’s financial performance improves or if the company has few very successful periods.

Therefore, the earnings used for dividends on common shares are calculated using the following formula:

Total Earnings = Net Income – Preferred Dividends

Dividing that earnings figure by the total number of outstanding common shares gives the Earnings per Share (EPS), and a portion of those earnings goes towards the distribution of dividends on common shares. That portion is determined by the dividend payout ratio and divided by the number of shares to obtain the dividend per share.

From this relationship, we can derive another way for calculating the DPS figure using the EPS and the payout ratio.

Dividends per Share = EPS x Dividend Payout Ratio

Example

Knowing only that a company has a $9 EPS and a 50% dividend payout ratio, we can calculate the dividends per share by using the formula above.

Dividends per Share = $9 x 0.50

Dividends per Share = $4.50

This works well for quick assessment of DPS levels, because the EPS and the dividend payout ratio are metrics that are frequently quoted and easily available on most financial websites. To calculate the DPS using the primary formula, investors must have the total earnings and the total number of common shares. To get those figures, investors might have to reference the company’s financial statements, which might not be as accessible as EPS and payout ratio figures.

Additionally, it is important to point out that using EPS and the payout ratio to calculate DPS might not yield exact results. The reason is that the input figures might not reference the exact same time frame. While the EPS might be an average for the trailing 12 months, the payout ratio might be for the most recent quarterly payout. Therefore, for accurate results, investors must make sure to use comparable figures. However, a close estimate might be sufficient for early-stage analysis when investors are looking to just narrow down the potential investments to a few candidates before engaging in detailed analysis.

Distribution Frequency

As noted in the example above, dividend payouts and DPS can have different connotations depending on how the annual figure is calculated and the time frame for which they apply. For a trailing DPS figure, we add all dividend distributions over the previous 12 months and use that figure for all calculations. A company that hikes its dividend payout every quarter might have a following DPS over the past year.

Q1:       $0.95

Q2:       $0.85

Q3:       $0.75

Q4:       $0.65

       Total Annual DPS:       $3.20

The $3.20 is the company’s trailing DPS figure.

Estimating Future DPS

We can estimate the forward DPS – the DPS payout expected over the next 12 month – by extrapolating from the information we have. The easiest way is to take the most recent DPS amount and multiply that figure by the number of periods.

Forward DPS = $0.95 x 4 = $3.80

In this case, multiplying the most recent dividend payout of $0.95 per share by four periods gives us an expected DPS of $3.80 for the upcoming 12-month period.

However, that method most likely will underestimate the DPS over the next year. Because the company’s trend over the past year is to increase its quarterly DPS $0.10 every period, it might be safe to estimate a similar pattern for the upcoming year. We can strengthen this assumption if we expand the time horizon and find out that the company has maintained that same quarterly dividend pattern over several years. Under this assumption we can estimate the forward DPS for the upcoming year as follows:

Q1:       $1.05

Q2:       $1.15

Q3:       $1.25

Q4:       $1.35

       Total Annual DPS:       $4.80

We can see that the forward DPS amount of $4.80 from the second estimation method is 26.3% higher than the $3.80 DPS from the previous estimate of multiplying the most recent quarterly DPS figure by the number of periods.

While these two methods are quite simple, investors can use any information available to devise their own estimation and analysis method. Instead of a flat amount increase per period, some companies will increase their dividend payments by a set percentage, increasing percentage, diminishing percentage, etc. Depending on the time and resources available, investors can make their future DPS estimation analysis as complex as they wish.

Dividends per Share Summary

The basic concept and the method to calculate the dividends per share metric are not complex. While quite simple, this metric provides one of the crucial pieces of information that income investors need when seeking the best dividend income equities for their investment portfolio.

However, in addition to quantifiable metrics – such as dividends per share – investors must evaluate the overall financial and operational health of the equity. Companies can – and often do – reduce or outright eliminate dividend payments on market downturns and other economic factors.

Therefore, the dividends per share is an important metric. However, investors must use it as just one of the tools in their investment analysis tool box to optimize their investment portfolio strategy.

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