What is Dividend Per Share?
The Dividend Per Share (DPS) is a financial ratio that represents the annualized dividend issued by a company, expressed on a per-share basis.
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The dividend per share (DPS) is a financial metric that measures the annual dividend issuance of a company on a per-share basis.
In corporate finance, dividends are defined as the distribution of a company’s after-tax earnings (i.e. net income) to common and preferred shareholders as a form of shareholder compensation.
With that said, a common metric used to assess the dividend policy of a company on a per-share basis is the dividend per share (DPS) ratio, which is a standardized metric that facilitates comparisons in dividend policies among different companies.
Unlike the gross dividend amount figure, the dividend per share (DPS) of a company can also be compared to that of historical periods to observe year-over-year (YoY) trends.
The dividend per share (DPS) formula divides the dividend issuance amount by the total number of shares outstanding.
The dividend issuance amount is typically expressed on an annual basis, meaning that a quarterly dividend amount is multiplied by four (i.e. four quarters in one fiscal year) – assuming that the quarterly dividend amount is to remain unchanged.
The total number of shares outstanding should include the impact of dilutive securities, as well as be calculated based on the annual weighted average share count between the beginning and end of period shares outstanding.
What is a Good DPS Ratio?
If the dividend per share (DPS) of a company increases, the reaction of the market tends to be positive, especially if a long-term dividend program rather than a one-time issuance.
The share price of the underlying issuer often rises post-announcement, albeit certain investor groups will sell their stake in the company because of a misalignment in interests.
Why? The decision to issue dividends stems from management’s confidence in the company’s future profitability and maintenance of its current market positioning.
But at the same time, the decision to distribute shareholder dividends can also be interpreted as meaning that the company’s opportunities to reinvest in itself and drive growth are limited.
On the other hand, the decision to reduce the dividend per share (DPS) is a negative market signal, indicative of uncertainty around the future stability of the company’s future profitability.
However, the context surrounding the issuance of a high dividend per share (DPS) must be considered.
For instance, the management team might have mistakenly announced an unsustainable dividend program prematurely, which it refuses to reduce (or end) to avoid sending a negative signal to the market. In fact, the decision by a corporation to issue dividends could cause the share price to decline in certain instances.
For example, if a company with an inflated share price from its positive growth prospects were to suddenly issue dividends rather than reinvest capital (or participate in a stock buyback), the existing investor base could start to sell off their positions.
Conversely, a company could perhaps engage in dividend issuances and stock buybacks while growing at a stable rate, as in the case of Apple (AAPL).
Apple Dividend Per Share (DPS) Example (Source: Barrons)
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Suppose a company issued a quarterly dividend of $50 million, with no announcements regarding cutting the dividend in the near term.
The annualized dividend amount is calculated to be $200 million.
- Annual Dividend Amount = $50 million x 4 = $200 million
Next, if the company is projected to have 90 million shares at the beginning of the period and 110 million shares outstanding at the end of the period, the weighted average share count is 100 million.
- Weighted Average Shares Outstanding = (90 million + 110 million) ÷ 2 = 100 million
Given those two inputs, if we divide the annualized dividend by the weighted average share count, we calculate $2.00 as the DPS.
- Dividend Per Share (DPS) = $200 million ÷ 100 million = $2.00
