Introduction
Earnings per Share (EPS) is one of the important elements in investment evaluation. Some investors look for buying shares of companies that provide a reliable income through large and continuous dividends. A company’s Dividend per Share (DPS) is the total amount of earnings attributed to each individual share paid to the shareholders of those shares. It can be expressed for a quarter or on an annual basis.
What are Earnings per Share?
To understand earnings per share, it is essential to grasp the concept of earnings. Earnings are the cash amounts that are paid to shareholders from the company’s profits. Investors can accept the cash payment or automatically reinvest it in additional shares of the company in what is known as a Dividend Reinvestment Plan (DRIP). Determining the company’s earnings per share is the most accurate way to identify the cash amount that can be expected for income from the investment on a per-share basis.
How Do Earnings per Share Work?
The vast majority of companies that pay dividends do so quarterly. To calculate the company’s earnings per share, the total amount of dividends paid is divided by the total number of outstanding common shares. The formula looks as follows:
DPS = Total dividends paid – any special dividends / Total shares outstanding
For example, if the company paid a total of $500,000 in dividends and there were one million shares outstanding, then the earnings per share would be 500,000 / 1,000,000 = 0.50, or 50 cents per share.
While investors can calculate the company’s earnings per share themselves, the annual report 10-K issued by most companies through the U.S. Securities and Exchange Commission provides this information, along with notes regarding share buybacks and other events that could affect the company’s earnings per share.
Types of Earnings
Earnings are typically cash payments made periodically to stockholders, but there are other types as well.
Property Earnings: In this case, the company offers investors tangible assets such as real estate, inventory, or equipment instead of cash. Earnings are recorded at the market value of the asset.
Stock Earnings: The company gives investors additional shares based on the number of existing shares owned by the investor.
Bond Earnings: The company issues a bond that is due to pay cash or new stock dividends later.
Liquidation Earnings: Typically issued when a company closes, where the company liquidates its assets and settles its financial obligations, then pays the remaining returns to investors as final dividends.
Estimating Future Earnings per Share
If the company has a record of paying a stable percentage of its earnings as dividends, it is possible to estimate what the future earnings per share will be in the company’s income statement. Here are the steps:
Identify net income. Identify the number of outstanding common shares. Divide net income by the number of outstanding common shares. Estimate the payout ratio by looking at past dividends. Multiply the payout ratio by the net income per share to obtain the estimated earnings per share.
Earnings and earnings per share are two ways to measure a company’s strength. A record of continuous dividend payments or rising earnings is generally interpreted as a sign of positive expectations for future growth. This can attract additional investors and lead to an increase in the company’s stock price.
It is important to note that a company that has paid a consistent percentage of its earnings as dividends may reduce or suspend dividend payments if business declines.
Alternatives to Earnings per Share
Another measure used by investors to evaluate a company’s strength and future prospects is Earnings per Share (EPS). EPS measures the allocation of profit to each common share in the company relative to the company’s total net profit. For example, if the company’s net profit is $20,000 and it paid $5,000 as dividends, then the earnings per share ratio is 25%.
Ratio
The earnings per share (EPS) of a company is not necessarily an indication of whether the company is a good or bad investment. Instead, the earnings per share ratio can indicate to investors whether the company is likely to provide returns in the form of income (through regular and substantial dividends) or through growth that will hopefully lead to an increase in the stock price.
Earnings per Share versus Dividends per Share
Although both earnings per share and dividends per share reflect the profitability of a company, only dividends per share give investors an idea of how much income the investments will provide through dividends. Here’s a look at what each offers:
Dividends per Share (DPS) Dividends per Share (EPS) The portion of the company’s earnings paid to shareholders A measure of the company’s profitability, expressed as net income per share of common stock Can help determine investment opportunities for investors seeking stable income through dividends Considered one of the most important metrics for identifying strong investments based on share price value Can indicate the company’s long-term stability Can provide insight into how fast the company is growing
What Does Earnings per Share Mean for Investors?
Calculating earnings per share is useful for investors who want their investments to provide a steady flow of money through dividends. A company that posts stable or increasing earnings over the years is an attractive investment for this type of investor.
A low earnings per share does not automatically mean there are concerns about the investment. It may simply mean that the company is investing its profits in research and development or in other areas that will enhance growth instead of returning money to investors through dividends. In theory, these choices will pay more dividends, leading to an increase in the stock price.
Key Takeaways
Dividends per share (DPS) is the total amount of dividends paid per share of stock owned in the company. It is usually calculated using the dividends paid in the last quarter. DPS provides a way to assess the strength and stability of the company while giving an idea of how much income investments will provide through dividends. A low DPS does not necessarily mean that the company is a poor investment. It may simply mean that the company is reinvesting its profits into growth instead of returning money to investors through dividends.
Source: https://www.thebalancemoney.com/what-are-dividends-per-share-5094492
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