The term dividends per share (DPS) refers to the total dividend a company pays out over a 12-month period, divided by the total number of outstanding shares. A company uses this calculation to share profits with its shareholders. DPS can indicate how profitable a company is over a fiscal period and it can tell an investor about the company's past financial health and its current financial stability.
- Dividends per share (DPS) is an important financial ratio in understanding the financial health and long-term growth prospects of a company.
- A steady or growing dividend payment by a company can be a signal of stability and growth.
- A declining DPS may be due to reinvestment in a firm's operations or debt reduction, but may also indicate poor earnings and be a red flag for financial hardship.
What Dividends Per Share Tells You
DPS is an important metric to investors because the amount a firm pays out in dividends directly translates to income for the shareholder, and the DPS is one of the most straightforward figures an investor can use to calculate his or her dividend payments from owning shares of a stock over time. Meanwhile, a growing DPS over time can also be a sign that a company's management believes that its earnings growth can be sustained.
For example, suppose company ABC had a DPS of 60 cents last year, but this year, it doesn't pay a dividend to its shareholders. This can signal to investors the company may be in poor financial health and cannot withstand the current market conditions. A decrease in DPS can thus cause investors to sell their stake in the company, driving the market value of ABC down further.
However, a decrease in dividend per share does not always signal a company is not financially stable. For example, suppose ABC did not pay out a dividend to its shareholders because it is using its profit to reinvest into the company to create a new product. This reinvestment into the business can potentially produce higher dividends in the long term.
How to Calculate Dividends Per Share
Dividend per share is the sum of declared dividends issued by a company for every ordinary share outstanding. The figure is calculated by dividing the total dividends paid out by a business, including interim dividends, over a period of time by the number of outstanding ordinary shares issued. 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 by using the following formula, where the variables are defined as:
DPS=SD−SDwhere:D=sum of dividends over a period (usuallya quarter or year)SD=special, one-time dividends in the periodS=ordinary shares outstanding for the period
Suppose company YXZ has been paying a steady dividend of 90 cents per share. The next year, company YXZ raises its dividend to $1.10 per share. This signals the company is financially stable and performing well in its current market condition. An increase in DPS also signals the management team is confident in the company's future profits.