Payout ratio
The payout ratio is the percentage of profit a company distributes as dividends. A low payout leaves room to reinvest and to sustain the dividend through bad years; one close to or above 100% means the company is paying out everything it earns, or more, leaving the dividend exposed to any drop in results.
How it is calculated
Payout = dividend per share ÷ earnings per share. With a dividend of €1.20 and EPS of €2.00, payout is 60 %: the company distributes six of every ten euros it earns and retains four to reinvest or pay down debt. The version that really matters uses cash rather than profit: total dividend ÷ free cash flow. If the dividend is €120M and FCF is €150M, the payout on cash is 80 %, and that number tells you whether the distribution comes out of money coming in or from somewhere else. A comfortable payout on earnings and one above 100 % on FCF at the same time is a classic signal.
The figures in the example are invented and rounded so the arithmetic can be redone by hand. They are not data from any real company.
What it is NOT
A payout above 100 % does not automatically mean the dividend is in danger: a company having a bad year can maintain it from accumulated cash, and that is normal and sometimes deliberate. What is worrying is it repeating for several years. And a low payout is not bad: it means the company is retaining to reinvest, and if its ROIC beats its cost of capital, that retained money is worth more in its hands than in yours.
Formula
Payout = dividendos ÷ beneficio neto See also
Explained in depth
See it on real data
Celsmar computes this from the accounts companies file with their regulator, and shows which line every figure comes from. Free to start, no card.
Definition for informational purposes. It is not financial advice nor a recommendation to buy or sell.