Definition
The payout ratio indicates how much of a company's profit is returned to shareholders versus retained for growth. A high ratio (80%+) limits reinvestment capacity and may be unsustainable if earnings decline. Mature, stable companies typically have higher payout ratios than growth companies.
functions Formula
Payout Ratio = Dividends Per Share / Earnings Per Share × 100%
lightbulb Example
EPS is $4.00 and DPS is $2.00. Payout ratio = 50%, meaning half of earnings are distributed and half retained for reinvestment.
verified_user Key Points
- Below 60% generally considered sustainable
- REITs required to pay out 90%+ of earnings
- Rising payout ratio with flat earnings is a warning sign
- Retention ratio = 1 − payout ratio