Payout ratio

The payout ratio is the split between paying owners now and reinvesting for later. A third paid out leaves two thirds funding growth; nine tenths paid out leaves almost nothing, and any growth from here has to be borrowed or issued for.

It is also the most direct test of whether a dividend is safe. A dividend costing more than the company earns is being funded from the balance sheet, and balance sheets run out.

$2.00 of dividend per share against $6.00 of diluted earnings per share.

1. 12.00 / 6.00 = 0.333.

Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.

• Under 50% generally leaves room to keep raising the dividend through a weak year.
• Above 100% means paying out more than was earned. That is routine for REITs, which are required to distribute most of their income and whose depreciation charge overstates their costs, and a warning almost anywhere else.
• Compare it against free cash flow as well as earnings. Earnings can be paid out on paper; dividends are paid in cash.

• It divides by earnings, which include non-cash charges, so it understates the true cover at asset-heavy companies and overstates it where earnings are flattered.
• One-off items in the denominator make a single year's ratio meaningless.
• It ignores buybacks, which are the larger part of shareholder returns at many companies.

Shown on the Dividends tab as the declared dividend per share against diluted earnings per share. Where earnings are not positive the ratio is not shown at all rather than being displayed as a large or negative number, since neither would mean what a reader would take it to mean.

The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.