Why is the Dividends per Share Formula Important?
Dividends per share (DPS) is an accounting ratio used to evaluate the total number of dividends declared for each share of issued stock. The issued stock taken into account is common stock. Declared dividends are the portion of the company’s profit that is to be paid to the shareholder. However, declared dividends are not the equivalent of paid dividends. The amount that is not paid to the shareholders is considered retained earnings. So, in a nutshell, dividends per share is important because it shows returns to the shareholders.
Dividends per share shows the percentage of the profit earned by a public company that is to be given to the shareholders. This amount is important to both the shareholders and investors. Shareholders care about this figure because dividends are one way they can gain a financial return after buying shares in a company. Investors use this ratio as one method of analyzing the financial capabilities of a company. Dividends per share only accounts for dividends that are to be distributed regularly, rather than one-time payments to shareholders.
Dividends per share tells the investors about profit growth.
When the DPS decreases, it shows that a company may not have the best financial health. As a result, some investors might reduce their investment in the company. For a public limited company, a drastic reduction in investment can be damaging to the long term prospects of the company. When DPS increases on an annual basis, the financial health of a company is considered to be good. Investors love to see this, of course, because it shows that the company has some solid growth strategies. Investors are much more likely to keep their investment in that scenario.
How to Calculate Dividends per Share
Here is the formula for calculating dividends per share:
DPS = Dividends Paid / Number of Shares
Dividends per share can be found in the financial statement as dividends that have recently been paid out. To get to the amount of dividends paid, you must add up all the dividends that have been paid in one year.
Here’s a quick example of the calculation:
XYZ company has a total of $400,000 dividends paid last year. This amount does not include the one-time payments. The total number of common stock shares outstanding is $1 million. As a result, the DPS is 400,000/1,000,000, which is 40 cents per share.
40 cents will need to be compared with the figures calculated for the previous years. If there is an increase then there will be a need to plan further expansion strategies. However, if over the years the dividends per share have been falling, then the company will have to re-evaluate their strategy. A consistently falling dividends per share amount means that the company has not been able to use the resources the investors provided. This can damage investor confidence in the company and hurt a their stock value. This is a big deterrent for future investment in the company.