Table of Contents
- 1 DIVIDEND PER SHARE DEFINITION
- 2 DIVIDEND PER SHARE (DPS) FORMULA
- 3 DIVIDEND PER SHARE CALCULATION WITH EXAMPLE
- 4 ANALYSIS/INTERPRETATION OF DIVIDEND PER SHARE
- 5 ADVANTAGES OF USING DIVIDEND PER SHARE RATIO
DIVIDEND PER SHARE DEFINITION
Dividend per share (DPS) is the total dividend declared for every common share outstanding. Just like, we find earning per share (EPS) because per share data provides a better idea of company’s profitability. Similarly, dividend per share (DPS) provides an idea of how much dividend an investor is going to get on a per share basis.
DIVIDEND PER SHARE (DPS) FORMULA
There are two formula’s to calculate DPS. Depending on the purpose of using DPS, you can use the formula that best fits your need.
|Dividend per share||=||Dividends|
|Number of Common Shares Outstanding|
You can calculate the dividend per share by dividing the dividends with the number of common shares outstanding for a given fiscal year. If your purpose is to know the amount of dividend then this formula should be used. Ex. you are holding 100 shares of a company. The Company announced a dividend of $5/share, so you will receive $ 500.
- Dividends: It only includes interim dividend to be distributed to common shareholders for a specific fiscal year. Preference dividend and special dividend are not be included here.
- Number of Common Shares Outstanding: It includes the no. of common shares outstanding as on the particular date. The Company makes the list of shareholders entitled to receive dividends on the record date. Number of outstanding shares as on that date is taken into the denominator.
|Dividend per share||=||Dividends||=||Earnings per share * Dividend payout ratio|
|Weighted Average Number of Common Shares Outstanding|
- Weighted average number of common shares outstanding: Changes in the no. of shares outstanding during the year are ignored in the first formula. In the second formula, No. of common shares outstanding is taken and weights are given to them based on the time they have remained outstanding during the fiscal year. Then, the weighted average is found out to take into consideration the changes in shares outstanding during the year.
To simplify let’s take a hypothetical example for weighted average shares:
|Date||Description||Increase||Decrease||Shares outstanding (A)||Time Weights (B)||(A)*(B)|
|1/1/2016||Beginning No. of shares outstanding||1,000,000||3/12 months||250,000|
|1/4/2016||Convertible debt converted into shares||200,000||1,200,000||7/12 months||700,000|
|1/11/2016||Shares Repurchased||600,000||600,000||2/12 months||100,000|
|Weighted average no. of common shares outstanding||1,050,000|
Here, Shares outstanding are given weight based on the time they were outstanding during the period. If the purpose is to analyze the company then, the second formula makes more sense.
DIVIDEND PER SHARE CALCULATION WITH EXAMPLE
|Description||Company X||Company Y|
|Profit attributable to common shareholders (A)||$ 2,000,000||$ 500,000|
|Dividends declared (B)||$ 1,000,000||$ 300,000|
|No of shares outstanding (C)||500,000||100,000|
|Earnings per share (D) = (A/C)||$ 4 / Share||$ 5/ Share|
|Dividend per share (E) = (B/C)||$ 2/ Share||$ 3/ Share|
ANALYSIS/INTERPRETATION OF DIVIDEND PER SHARE
DPS of $ 3/ share suggests that the investor will receive $3 for every share held. In the example above, Company Y is considered better as it has $ 3/share DPS compared to $2 /share of company X. It should be noted that this kind of comparison should be done between similar companies. Companies of different nature require more detailed analysis and research.
ADVANTAGES OF USING DIVIDEND PER SHARE RATIO
DPS provides a better comparability between two companies as it is on per share basis. You should not compare the absolute amount dividends as it might lead to an unreliable conclusion due to differences in the nature of companies.
DPS Trends as Signals for Markets
Increasing the level of DPS is considered to be a positive signal as it shows that company has more confidence in its future earnings. Similarly, reducing that level would send a negative signal. In this scenario, you should always go through dividend policy before concluding anything.
Simplicity and predictability of DPS
DPS is a very simple ratio to understand. Also, if a company tries to maintain a stable level of DPS then it will result into less fluctuations in DPS statistics. Due to which, predicting the future dividend income through DPS becomes easy.
Used in Valuation model
DPS is used in many valuation models (i.e. dividend discount model) due to its predictability. It is one of the most useful ratios in valuing and analyzing the company’s stock.
Using DPS as a metric provides more comparability and reliable interpretation rather than the absolute dividend. Please note that you should cross check the method with which DPS is calculated. Using any DPS statistics blindly might lead to a faulty analysis. DPS is considered to be a positive sign for the financial strength of the company. However, DPS is affected by many factors like Company’s dividend policy, reinvestment opportunities available, size, industry, life cycle stage etc. Hence, it should be used with caution and along with other metrics to conclude about the financial strength of the company.
- CFA Level 1 2016 Curriculum
Last updated on : November 6th, 2018