Using ratios to analyse companies

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17. Dividend ratios

A dividend is the distribution of part of a company's earnings to shareholders.

Strictly speaking all the after-tax profits of a company belong to shareholders, but usually the company's directors make a recommendation at the company's AGM that part of the profits are retained by the company to re-invest in the business.

To find out what dividend a company has paid, look for the total value of the dividend paid in the P&L, then divide it by the number of ordinary shares in issue as shown in the balance sheet, or notes to the balance sheet. If the company has paid £1m in dividends and there are 50m shares, the dividend per share is 2p. Most published accounts actually quote Dividend per Share for you.

The ratios used in connection with dividends are:

• Dividend yield

  Definition: Gross dividend as a percentage of share price

  Calculation:

  Dividend per share x 100 / Share price

  Example

  2p x 100 / 100p = a dividend yield of 2

Dividend yield calculator Dividend per share     p Share price     p   Dividend yield:

• Dividend cover

  Definition: At its simplest, earnings per share divided by the dividend per share

  Example

  If EPS is 8p and DPS is 2p, the dividend cover is 4.

1. Why bother with ratios? 2. A word of warning 3. The P&L and the balance sheet 4. Grouping the ratios 5. Profit margin 6. Return on capital employed (ROCE) 7. Sales as a multiple of capital employed 8. Stockturn 9. Debt collection 10. Payment of trade creditors 11. Cash-to-cash cycle 12. Gearing 13. Interest cover 14. Current ratio 15. Quick ratio (acid test) 16. Earnings ratios 17. Dividend ratios 18. Other ratios 19. Sources of information 20. Conclusion

• Magic Numbers