Long-term investing
Payout ratio
Definition
The payout ratio is the share of a company's earnings paid out as dividends: dividends per share divided by earnings per share. A company that earns $4 a share and pays $1.60 has a 40% payout ratio. A ratio above 100% means it is paying out more than it earns, which cannot continue indefinitely.
Example
Say company XYZ earns $3.00 a share and pays $2.40 in dividends, a payout ratio of 80%. In a bad year earnings fall to $2.00 while the dividend stays at $2.40, so the ratio jumps to 120% and the missing $0.40 a share must come from cash or borrowing. A company paying $0.90 out of the same $3.00 has a 30% ratio and far more room to keep paying through a downturn.
Hypothetical numbers, for illustration only.
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