Payout ratio: the share of earnings paid out as dividends

Definition

The payout ratio is the share of net income paid to shareholders as dividends. It shows how much the company keeps to invest, pay down debt or get through a bad year. A low payout ratio leaves room to raise the dividend, a payout ratio close to 100% leaves none.

Where to find it in an annual report

Earnings per share and net income appear at the bottom of the income statement. The proposed dividend per share is in the management report, in the section on the appropriation of earnings. Many companies publish their own payout ratio and dividend policy.

Common thresholds

Growing dividend: 60% at most for green, up to 80% for orange, red above. Utilities and telecoms often pay out 70 to 90% with stable earnings. A growing company that pays out more than 50% deprives itself of the means to invest.

Pitfalls

• Accounting profit can differ from cash: a reasonable payout ratio on earnings can hide a dividend not covered by FCF. Look at the FCF payout ratio too.
• Unusually low earnings (an exceptional impairment) make the payout ratio jump for one year without the dividend being at risk: use recurring earnings.
• A payout ratio above 100% means the company pays out more than it earns, by drawing on its reserves or borrowing.
• Share buybacks are not part of the payout ratio: a company that returns a lot of money through buybacks seems to pay out little.

Where it does not apply

• Real estate companies (REITs): the law requires them to distribute most of their earnings, and depreciation of buildings reduces their accounting profit. The payout is rather measured on operating cash flow.
• Loss-making companies: the ratio makes no sense.