Corporate actions
Payout ratio
The share of earnings a company pays out as dividends rather than reinvesting.
How it works
A low ratio leaves room to grow the dividend and to fund the business. A ratio near or above 100% means the company is distributing everything it earns, or more.
The right level varies by business. A utility with predictable cash flows can sustain a much higher ratio than a cyclical manufacturer.
Where it misleads people
A ratio above 100% is only sustainable while the company can fund the gap from cash reserves or borrowing. It is one of the most reliable predictors of a dividend cut.
Formula
Payout ratio = dividends per share ÷ earnings per share × 100Related terms
- DividendA cash payment a company makes to its shareholders out of its profits.
- Dividend coverHow many times over a company’s earnings could pay its dividend.
- Dividend cutA company reducing or suspending its dividend.
- Free cash flowCash left over after paying for the investment needed to maintain and grow the business.
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