How to Calculate the Dividend Payout Ratio Based on Profit Margin

by Bryan Keythman, studioD

A dividend payout ratio shows the percentage of a company's net income that it pays out as cash dividends to its shareholders. Profit margin shows the percentage of a company's sales that it keeps as net income. If you know a company's profit margin, you can determine its dividend payout ratio using some of its other financial information. While there is no specific acceptable payout ratio, one that is close to 100 percent means a company is paying out nearly all of its earnings as dividends.

Find the amount of a company's revenue on each of its last four quarterly income statements. A public company reports its first quarter through third quarter income statements in its 10-Q quarterly reports and its fourth-quarter income statement in its 10-K annual report. You can obtain these for free from the U.S. Securities and Exchange Commission's EDGAR online database. For example, assume a company generated $5 million, $4 million, $6 million and $5 million in revenue during the past four quarters.

Calculate the sum of its revenue in each of its past four quarters to determine the revenue it generated over the past 12 months, or its trailing 12-month revenue. In this example, calculate the sum of the four quarters to get $20 million in trailing 12-month revenue.

Multiply the company's trailing 12-month revenue by its known profit margin to calculate its trailing 12-month net income. In this example, if the company's profit margin is 10 percent, so multiply $20 million by 10 percent to get $2 million in trailing 12-month net income.

Find a company's trailing 12-month dividend per share and its number of shares outstanding in the company's stock quote section. In this example, assume the company's trailing 12-month dividend is $1 per share and that the company has 600,000 shares outstanding.

Multiply the company's trailing 12-month dividend per share by the total number of shares outstanding to calculate its total trailing 12-month dividend. In this example, multiply $1 by 600,000 to get a trailing 12-month dividend of $600,000.

Divide the company's trailing 12-month dividend by its trailing 12-month net income to calculate its dividend payout ratio. In this example, divide $600,000 by $2 million to get a dividend payout ratio of 0.3, or 30 percent. This suggests the company generates sufficient earnings to likely continue its dividend payment.

About the Author

Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.

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