Dividend per share

What Is Dividend Per Share?

Dividend per share (DPS) is a financial metric that represents the total amount of dividends declared by a company for each outstanding share of its common stock over a specific period, usually a quarter or a year. It is a key component within corporate finance and provides investors with insight into the portion of a company's profits distributed to its shareholders. A higher dividend per share generally indicates a company is returning more of its earnings directly to investors, which can be particularly attractive to those seeking income from their investments. The dividend per share is crucial for evaluating a company's dividend policy and its commitment to shareholder returns.

History and Origin

The practice of distributing profits to owners has ancient roots, but the formal concept of dividends as paid by corporations to public shareholders gained prominence with the advent of modern stock markets. One of the earliest documented instances of a publicly traded company paying a dividend involved the Dutch East India Company. Established in 1602, the company initially faced criticism from shareholders regarding capital allocation. It eventually paid its first dividend in 1610, reportedly in spices, before transitioning to cash dividends by 1612.⁸

Throughout the 19th and early 20th centuries, dividends were a primary focus for investors in assessing the merit of a stock, partly due to limited financial transparency and reporting compared to today.⁷ The legal framework governing corporate dividends in the United States has evolved, with early American dividend law often focused on preventing payments that would prejudice creditors.⁶ Over time, the regulatory landscape, including mandates from bodies like the U.S. Securities and Exchange Commission (SEC), has shaped disclosure requirements for dividend actions, aiming to provide necessary information for informed investing.⁵

Key Takeaways

• Dividend per share (DPS) measures the total dividends paid out per share of a company's common stock.
• It is a key indicator for income-oriented investors and reflects a company's commitment to returning capital.
• DPS can be a sign of financial health and stability, as consistent payments often come from steady cash flow and earnings.
• Growth in dividend per share over time can signal a company's increasing profitability and confidence in future performance.
• When evaluating DPS, investors should also consider the company's earnings and overall dividend policy to ensure sustainability.

Formula and Calculation

The formula for calculating dividend per share is straightforward:

To calculate the dividend per share, the total amount of dividends declared for common shareholders over a period is divided by the number of outstanding shares of common stock during that same period. For instance, if a company pays both common and preferred dividends, only the dividends attributable to common shares are used in the calculation of common dividend per share.

Interpreting the Dividend Per Share

Interpreting the dividend per share involves more than just looking at the absolute number. Investors typically consider DPS in relation to a company's stock price to calculate the dividend yield, or in relation to its earnings to understand the payout ratio.

A consistently increasing dividend per share often indicates a financially sound company with stable or growing net income and a management team confident in its future prospects. For income-focused investors, a higher DPS translates to more direct cash returns. However, a very high DPS relative to earnings might suggest an unsustainable payout ratio, where the company is distributing too much of its profits, potentially limiting funds for reinvestment or growth. Conversely, a low or zero DPS might mean the company is reinvesting all its earnings back into the business for growth, or it may be struggling financially. Analyzing DPS in conjunction with other valuation metrics provides a more complete picture of a company's financial health and its appeal as an investment.

Hypothetical Example

Imagine "GreenTech Innovations Inc." had a profitable year. The company's board of directors decided to declare dividends to its shareholders.

• Total cash dividends declared for common shareholders: $5,000,000
• Total number of common shares outstanding: 10,000,000 shares

To calculate the dividend per share (DPS):

In this example, each common shareholder of GreenTech Innovations Inc. would receive $0.50 for every share they own. This $0.50 dividend per share would typically be paid on a specific payment date to shareholders of record as of a certain record date.

Practical Applications

Dividend per share is widely used in various financial contexts:

• Investor Income: For income-seeking investors, DPS directly represents the cash income they receive from their investments. This is particularly relevant for retirees or those building a portfolio for passive income.
• Company Analysis: Financial analysts use DPS to assess a company's profitability and its dividend policy. Consistent dividend growth can signal financial strength and disciplined capital allocation. Analysts often review a company's financial statements, including the income statement and balance sheet, to understand the sources and sustainability of dividend payments.
• Dividend Discount Model (DDM): DPS is a fundamental input in dividend discount models, a type of valuation model that values a company based on the present value of its future dividends.
• Regulatory Filings: Publicly traded companies are required to disclose dividend information to regulatory bodies like the SEC. For instance, companies must provide prompt notice to the exchange regarding any dividend action, including the declaration of a dividend.⁴ News outlets like Investing.com often report on these declarations, such as Jacobs' announcement of a quarterly cash dividend of $0.32 per share.³ This information is part of a company's investor relations efforts to keep the market informed.

Limitations and Criticisms

While dividend per share is a valuable metric, it has limitations and has faced criticism:

• Dividend Irrelevance Theory: Franco Modigliani and Merton Miller proposed the "dividend irrelevance theory" in 1961, arguing that under certain ideal conditions (e.g., no taxes, no transaction costs, rational investors, perfect information), a company's dividend policy does not affect its firm value.² They posited that the value of a firm is determined solely by its earning power and investment decisions, not how those earnings are distributed between dividends and retained earnings.¹ In essence, a dollar of dividends is offset by a dollar of capital appreciation (or vice versa), making the payout decision irrelevant to shareholder wealth in a perfect market.
• Market Imperfections: In the real world, market imperfections such as taxes, transaction costs, and information asymmetry exist, which can make dividend policy relevant. For example, dividend income may be taxed differently than capital gains, and some investors prefer the certainty of cash dividends over uncertain future capital gains.
• Sustainability: A high dividend per share is not always sustainable, especially if it exceeds the company's earnings per share or is funded by debt rather than profits. Investors must look beyond the absolute DPS figure to assess the underlying financial health of the company.
• Signal Misinterpretation: While a dividend increase often signals management confidence, a dividend cut or omission can drastically affect investor sentiment and stock price, even if the underlying business fundamentals are sound.

Dividend Per Share vs. Earnings Per Share

Dividend per share (DPS) and earnings per share (EPS) are two distinct but related financial metrics that provide different insights into a company's performance.

Confusion between the two often arises because both are per-share metrics derived from a company's profitability. However, DPS reflects what shareholders receive, while EPS reflects what the company earns for each share. A company with high EPS may choose to retain most of its earnings for reinvestment, resulting in a low or zero DPS, aiming for future capital appreciation. Conversely, a mature company might have a lower EPS but a high DPS, distributing a larger portion of its profits.

FAQs

What does it mean if a company's dividend per share is increasing?
An increasing dividend per share typically indicates that a company is financially healthy, profitable, and confident in its future cash flow generation. It suggests the company is growing its earnings and is willing to share a larger portion of those profits with its shareholders.

Is a higher dividend per share always better?
Not necessarily. While a higher dividend per share means more income for investors, it's crucial to assess the sustainability of that payment. If a company's dividend per share is high but its earnings per share or cash flow cannot support it, the payment might be unsustainable and could be cut in the future. It's important to look at the payout ratio and the company's overall financial stability.

How does dividend per share relate to dividend yield?
Dividend per share is the numerator in the dividend yield calculation. Dividend yield is calculated as (Dividend per share / Current stock price). It expresses the dividend as a percentage of the stock's price, providing a measure of the return on investment from dividends alone.

When is dividend per share typically announced and paid?
Companies typically announce their dividend per share, along with key dates like the ex-dividend date and record date, shortly before the payment is made. Dividends are often paid quarterly, but some companies pay monthly, semi-annually, or annually.