How do you know how much money a company is returning to shareholders?
Some companies pay out a certain portion of their earnings, while others do not pay at all.
Let me help you with what "Dividend Payout Ratio (DPR)" is!
It tells you how much money a company is returning to shareholders as dividends versus how much it is keeping in hand to reinvest - for growth, to pay off debt, or add to cash reserves.
Simply, dividend payout ratio = dividends paid/ net income
But what's the conclusion?
If the DPR is high, it can mean
- Company has enough cash flows to expand the company.
- OR the Company does not have enough expansion opportunities and hence they're paying out the excess cash to investors.
Similarly, a low payout ratio can mean
- Company is using the excess cash for expansion.
- Company is not earning enough to distribute dividends to its shareholders.
You can't judge anything with this figure alone but DPR along with other parameters can help you with a direction.
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