What is a payout ratio, and how do you read it?

The formula

Payout ratio = dividend per share ÷ earnings per share (EPS) × 100

Example (illustrative): EPS is THB 4 and the dividend is THB 2.80, so the payout ratio is 70%. The company pays out 70 satang of every baht it earns.

How to read it

• Low: the company keeps most of its profit to reinvest. There may be room to raise the dividend, but it may also just be a policy of not paying much
• Very high, near or above 100%: it pays out almost all, or more than, that year's profit. The gap must come from reserves or borrowing, which cannot go on for long

There is no single number that is good for every company. Policies differ by industry, so compare with companies in the same sector and look at several years.

Pitfalls

• A year's profit can include one-offs, such as a gain on an asset sale, which distort the ratio
• Accounting profit is not the same as cash received, so look at cash flow too
• REITs and infrastructure funds usually must pay out most of their adjusted net profit, so do not compare their payout ratio with ordinary stocks
• In a year when profit falls, the ratio jumps even if the dividend stays the same. Look at the trend, not one year

FAQ

Is a higher payout ratio better?

Not always. A high ratio returns more cash now, but if it leaves nothing to grow the business, or profit falls, the dividend usually falls too. See a high dividend yield doesn't always mean a good stock.

Where do I find earnings per share?

In the company's financial statements and the stock data on the Stock Exchange of Thailand (SET) website. Check the original source before you decide.

Read next

Check the dividend history of stocks you follow

Open a stock page in PanPhonDee to see how many years it has paid and how much each year, then compare with its profit yourself.

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