Dividend per share

Dividend per share
See also
Free cash flow yield Accrual rate Plowback Ratio Appraisal right Book value per share Profit factor Swap Ratio Degree of financial leverage Dividend

Dividend per share (DPS) is an indicator closely related to Earnings per Share (EPS) showing what part of the company's profit falls on one share traded. DPS next to EPS is one of the main indicator on the capital market. Thanks to it, you can assess the probable benefits of the owners of the shares due to payment of dividends. It is primarily dependent on the dividend paid by the company in relation to one share. This has the greatest impact on interested shares, because it shows them a profit for each share they own.

What is dividend?

Dividend is amount of money paid to shareholders by company they own. It is paid regularly for example once a year, fout times a year. For the investor it is a source of profits. That is why investors choose tho most profitable companies before they invest in any. What helps them decide which company to choose? Companies usually announce to the public how much and when it will pay dividend. It is very important to remember that a concern may interrupt payment of dividend at any time. It is company's choice if it will pay the dividend or keep it to reinvestment.

How to calculate dividend per share?

There are two ways to calculate DPS.

1. $DividendPerShare={\frac {Dividends}{NumberofCommonSharesOutstanding}}$
2. $DividendPerShare={\frac {Dividends}{WeightedAverageNumberofCommonSharesOutstanding}}$

Dividends is the amount of money to be distributed to the shareholders for a particular fiscal year. It does not include special or preferred dividens.

Number of shares outstanding is the number of shares in possession. On the record date the company presents the record shareholders entitled to receive dividend.

Weighted average number of common shares outstandingis the number of shares changing through the year and with a specified weight (based on the time remaining to the fiscal year). And then this change of shares is important trading during the year .

Why using Dividend per share?

• Equivalence. It is easier to compare situation of two companies by taking dividend per share way as then investors can see how much profit will provide one single share. Comparing dividend amounts of two companies does not make sense as there is no distinction of how much share this company possess.
• Signs for market. The higher dividend per share gets it means that company is in a good situation and a lot of investors are willing to co-operate. And the same on the opposite the cheaper dividend per share becomes the investor are not so sure it will be a profitable investmenets.
• Easy and simple benchmark. It is an easy to understand how dividend per share works. It is a good thing if the fluctuation of dps are not so big, then it is easier to predict the future.
• Valuation model. Dividend per share is a ratio used in for example dividend discount model

What is the difference between Dividend per share and Earnings per share

Earnings per share are index of the company's profitability depending on how much net income it gets per each shares outstanding. Dividend per share are the amount of money paid as a dividend to shareholders per each share.

References

• Consler J. (2011). Earnings per share versus cash flow per share as predictor of dividends per share. "Managerial Finance", 37(5), p. 482-488.
• Nissim, D., & Ziv, A. (2001). Dividend changes and future profitability. The Journal of Finance, 56(6), 2111-2133.
• Bielstein M. (2009). Accounting for Distributions to Shareholders with Components of Stock and Cash in the Calculations and Presentation of Earnings per Share, "FASB Emerging Issues Task Force" 09(1), p. 10-12.
• Hussainey K. (2010). Dividend Policy and Share Policy Volitality: UK Evidence, "Journal of Risk Finance", p. 7-14.
• Garba A. (2014). Impact of Dividend- Per- Share on Common Stock Returns: A Case Study of Some Selected Manufacturing Firms Listed on the Nigerian Stock Exchange "European Journal of Business and Management", 6(30), p. 36-40.

Footnotes

Author: Ewelina Kruszewska