Earnings Per Share (EPS) vs. Dividends Per Share (DPS): What's the Difference?

Earnings Per Share (EPS) vs. Dividends Per Share (DPS): An Overview

Earnings per share (EPS) and dividends per share (DPS) are both reflections of a company's profitability, but that's where any similarities end. Earnings per share is a ratio that gauges how profitable a company is per share of its stock. On the other hand, dividends per share calculates the portion of a company's earnings that is paid out to shareholders.

Both measures have their uses for investors looking to break down and assess a company's profitability and outlook.

Key Takeaways

  • Earnings per share (EPS) and dividends per share (DPS) are both reflections of a company's profitability.
  • Earnings per share is a gauge of how profitable a company is per share of its stock.
  • EPS can be diluted by the introduction of new shares through secondary issues, convertible securities, or employee stock options.
  • Dividends per share, on the other hand, measures the portion of a company's earnings that is paid out to shareholders.
  • Many companies that do not pay out dividends, and so cannot be analyzed using DPS.

What Is The Difference Between Earnings-Per-Share And Dividends-Per-Share?

Earnings Per Share (EPS)

Earnings per share (EPS) speaks to a company's profitability and is one of the most popular metrics that analysts point to when evaluating a stock. EPS represents a company's net income allotted to each share of its common stock. Companies tend to report EPS that is adjusted for extraordinary items and potential share dilution.

Basic EPS is calculated as:

EPS = (net income - preferred stock dividends) ÷ (outstanding shares)

For example, if company ABC, Inc. has 20 million shares outstanding, had a net income of $10 million, and paid out a dividend of $1 million to its preferred stockholders for the last fiscal year, the EPS is 45 cents ($10 million - $1 million) ÷ (20 million shares outstanding).

Diluted EPS

There are both basic and diluted EPS. Basic EPS does not factor in the dilutive effect of shares that could be issued by the company. Diluted EPS does. When the capital structure of a company includes stock options, warrants, restricted stock units (RSU), these investments—if exercised—can increase the total number of shares outstanding. The diluted EPS assumes that all shares that could be outstanding have been issued. This is a more conservative way of using EPS and is often preferred by analysts compared to non-diluted EPS.

Using EPS

A company's earnings-per-share is an often-watched metric. Quarterly and annual earnings announcements will be preceded by analysts' estimates of EPS. If a company misses EPS estimates, you can expect the stock to drop. A surprise earnings beat, on the other hand, can see the stock hap up. In general, the higher the EPS, the better. But, since different companies have different amounts of shares outstanding at different prices, a better tool for comparison is the price-to-earnings (P/E) ratio. This simply is a measure of the stock price as a multiple of its EPS. A P/E of 10x therefore means that a stock's price is 10x higher than its EPS (e.g., a stock trading $10 has $1 EPS).

Dividends Per Share (DPS)

Dividends per share (DPS) is the number of declared dividends issued by a company for every ordinary share outstanding. It is the number of dividends each shareholder of a company receives on a per-share basis. Ordinary shares, or common shares, are the basic voting shares of a corporation. Shareholders are usually allowed one vote per share and do not have any predetermined dividend amounts.

Dividends per share is calculated by dividing the total number of dividends paid out by a company (including interim dividends) over a period of time, by the number of shares outstanding. A company's DPS is often derived using the dividend paid in the most recent quarter, which is also used to calculate the dividend yield.

DPS can be calculated using the formula:

DPS = (total dividends paid out over a period - any special dividends) ÷ (shares outstanding).

For example, suppose company XYZ paid $1 million in dividends to its preferred shareholders last year, none of which were special dividends. The company has 5 million shares outstanding, so the DPS for company XYZ is 0.2 per share.

Using DPS

Dividends per share is often used to estimate a stock's dividend yield, calculated as DPS divided by the stock price. The higher the dividend yield, the more profits a company pays out to shareholders on a relative basis. Value investors often seek out high-dividend yield stocks. DPS can also be used for dividend growth stock valuation models, such as the Gordon growth model. These models discount the future dividends per share to estimate a fair value per share.

The dividend-payout ratio is also a number that some investors consider, which represents the overall portion of profits paid back to shareholders as dividends (the ratio profits not paid out is, in turn, called the retention ratio). These ratios indicate how much money a company is able to put toward growth opportunities. A payout ratio that is too high, for instance, may signal that a company does not see many such opportunities available, and may be a red flag.

Many stocks do not pay dividends, especially newer companies or those in growth industries like biotech, internet, or computing. Instead, these companies reinvest all profits back into growth opportunities. As a result, DPS is not applicable to these stocks.

Key Differences

Earnings per share demonstrate how profitable a company is by measuring the net income for each outstanding share of the company. For shareholders, EPS is an indication of how well a company is performing as it represents the bottom line of a company on a per-share basis. The EPS figure does not reflect the cash that shareholders receive, however. It is only an accounting figure.

Dividends per share, on the other hand, do represent the portion of the company's earnings that is paid out to each shareholder. Increasing DPS is a great way for a company to signal strong performance to its shareholders. For this reason, many companies that pay a dividend focus on adding to the DPS. Since many growth companies do not pay out dividends, however, EPS is often a more useful metric.

Earnings per share (EPS) is generally considered to be the single most important variable in determining a share's price. As a result, companies that report EPS that fall below analysts' estimates can see their share prices drop steeply.

How Do You Calculate Earnings Per Share (EPS)?

Basic EPS is calculated as:

EPS = (net income - preferred stock dividends) ÷ (outstanding shares)

Diluted EPS uses total authorized shares instead of outstanding shares.

What Is a Good Earnings Per Share (EPS)?

A good EPS is relative. If EPS beats analysts' estimates, it is often a good sign. Moreover, if a company shows steady earnings growth over time, it points to financial strength.

How Do You Calculate Dividends Per Share (DPS)?

DPS is calculated as:

DPS = (total dividends paid out over a period - any special dividends) ÷ (shares outstanding).

What Is a Good Dividend Per Share (DPS)?

This depends. A good DPS will be one that attracts investors seeking dividend income, but which does not leave the company with so little profits left over that it cannot invest in growth opportunities. Many growth companies or new ventures do not pay any dividends, but that does not make these poor investments.