Can a company declare a dividend that exceeds its earnings per share?

By Ken Clark AAA
A:

Yes, it can. In fact, many well-known Fortune 500 companies have paid dividends in years where they posted negative earnings per share!
When it comes to declaring and paying dividends, current earnings per share has nothing directly to do with whether a company is able to pay a dividend. Keep in mind that a company with a lower earnings per share (EPS) than its dividend in a current year may be coming off of a string of more profitable (high EPS) years, from which it has set aside cash to pay future dividends.

The only real numbers that matter in paying dividends are "retained earnings" and available cash. From a management point of view, retaining some of the shareholders' earnings quarterly or yearly makes a lot of sense. Having a large retained earnings balance allows a company to pay consistent dividends with no negative surprises. In addition, the company is able to keep cash on hand to reinvest in its future expansion.

On a related note, many investors do not realize that a company's earnings per share is calculated after the higher yielding preferred stock dividends have been paid. In other words, a large portion of a company's dividend costs already may be reflected in the EPS number that most investors look at.

For more on this topic, read Stocks Basics: Different Types of Stock and Types of EPS.

This question was answered by Ken Clark.

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