ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Finance: What is Dividend Coverage/the Dividend Payout Ratio? 7 Views


Share It!


Description:

What is Dividend Coverage/the Dividend Payout Ratio? The Dividend Cover ratio is the factor by which a company can overpay its dividend when its net income is broken down by the dividend rate. The Dividend Payout ratio, conversely, is the dividend divided by net income. It is also used to factor with earnings in order to calculate earnings per share.

Language:
English Language

Transcript

00:00

finance a la shmoop what is dividend coverage and what is the dividend payout

00:07

ratio? whatever.com has earnings big earnings a hundred million dollars worth

00:16

of earnings this year from sales of a whole lot of whatever's the board green [People working in a factory]

00:21

lights a dividend payment of 40 million bucks that is the company will pay 10

00:26

million dollars to its common shareholders of record four times in

00:30

this next year the payout is 40 million because well

00:35

you know it's paid out and yeah clever titling know is never a thing on Wall

00:39

Street and the payout ratio is 40 over a hundred that hundred million of earnings [Payout ratio calculation appears]

00:44

or forty percent well why does the payout ratio even matter?

00:48

well companies hate having to cut their dividends and they love raising them if

00:52

the former well stock prices usually crash if the latter well they usually go

00:57

up and companies love it when their stock prices go up duh so what would [Whatever.com share price rises]

01:02

happen if whatever dot-com stumbled in its earnings tumbled and then

01:05

shareholders mumbled that the earnings payout ratio had crumbled that is... okay

01:10

stop with the rhyming bad timing okay now we're stopping and yeah that is what

01:15

if the earnings of whatever.com went down next year to only 50 million

01:18

remember they were a hundred million now they're only 50....hmm

01:21

problem because now the payout ratio is 80 percent 40 over 50 yeah very

01:27

difficult situation the company thought it would have tons of earnings to cover

01:31

its dividend at the forty million dollar level more or less forever

01:35

but clearly it did not so now what well if earnings recover and go back to a [Man discussing whatever.com's earnings]

01:41

hundred million dollars on their way to the 300 million they projected well,

01:45

then life is grand no sweat no heavy decisions to be made

01:48

but what if earnings fall further to be only thirty million the following year

01:53

well then whatever dot-com has to either borrow money or deplete its cash

01:57

reserves just to cover its dividend in which case the payout ratio would then

02:03

be over a hundred percent meaning that the earnings were 30 million and the [Earnings appear]

02:07

dividend was to be forty well then the payout ratio would be 40 over 30

02:12

133% ouch can't do that for very long without going bankrupt so payout ratios [Wheel spins and lands on bankrupt]

02:17

matter because they give a sense for the safety or certainty that that dividend

02:22

will continue at its present rate if the ratio is low well odds are good the

02:27

company could certainly afford to raise the dividend over time or at least not

02:30

cut it yeah for a very long time ideally and if the ratio is high well your [Dividend cut with scissors]

02:35

bottom line may soon be bottoming out back-end load there if i ever saw it...

Up Next

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Related Videos

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...