What Is a Dividend Payout Ratio? What It Measures and How to Compute It From a Nigerian Annual Report

A dividend payout ratio is the proportion of a company's profit for a year that it pays to shareholders as dividends, expressed as a percentage. It is computed by dividing the total dividend declared for the year by the profit attributable to ordinary shareholders, or equivalently by dividing dividend per share by earnings per share. The rest of the profit, whatever is not paid out, is retained in the business. The ratio therefore describes a choice the directors made about the year's profit; it is not a measure of how much you receive relative to what you paid, which is what dividend yield describes.

How to Compute It From Published Figures

Everything needed is in the annual report. The income statement gives profit attributable to owners of the parent. The earnings per share note gives basic EPS. The directors' report and the notes on dividends give the dividend per share proposed for the year, and any interim dividend already paid. Nigerian companies typically pay an interim dividend during the year and a final dividend after the year end, approved at the AGM, so the total for the year is the two added together.

1. Find the total dividend per share for the financial year: interim plus proposed final, in the same unit, naira or kobo.
2. Find basic EPS for the same year from the earnings per share note, in the same unit.
3. Divide dividend per share by EPS and multiply by 100 to give a percentage.
4. Alternatively, divide the total dividend in naira, shown in the dividends note or the statement of changes in equity, by profit attributable to ordinary shareholders.

As an illustration with invented figures: a company reports basic EPS of ₦2.00 and declares an interim dividend of 30 kobo and a final dividend of 70 kobo, a total of ₦1.00 per share. Its payout ratio for that year is 50%. The inverse of the payout ratio is sometimes quoted as dividend cover: in this example the dividend is covered two times by earnings.

Which Dividend and Which Profit

The ratio is only meaningful if the numerator and the denominator refer to the same year. A final dividend is declared and paid after the year end, so the dividend paid in cash during a year usually belongs partly to the previous year. Use the dividend proposed for the year, as the directors' report states it, against that year's profit. Use profit attributable to ordinary shareholders, not operating profit or profit before tax. Where a company has issued bonus shares during the year, use the restated EPS so that the per-share figures are on the same share count. Scrip dividends, where shareholders can take new shares instead of cash, are counted at their cash value.

Why the Ratio Varies So Much by Sector

A payout ratio reflects what a company needs to keep. Businesses that must reinvest heavily to keep operating or growing retain more; businesses whose assets are already in place, or whose regulators or shareholders expect cash distribution, pay out more. On the NGX the pattern is visible across sectors.

• Banks: dividends are constrained by regulatory capital requirements set by the Central Bank of Nigeria. A bank building its capital base, or one under a regulatory directive to retain profit, pays out less regardless of how much it earned.
• Consumer goods and cement: mature producers with established plants often distribute a large part of profit, while those in the middle of a capacity expansion retain more to fund it.
• Telecoms and infrastructure: heavy ongoing capital spending on networks competes with dividends for the same cash.
• Oil and gas: payouts move with commodity prices and with the timing of large projects.
• Holding companies: the parent's ability to pay depends on dividends received from subsidiaries, which may themselves be restricted.

Because of these differences, a payout ratio is only comparable between companies in the same sector at a similar stage, and even then the reasons behind the number matter more than the number itself.

The Limits of the Number

• It is based on accounting profit, not cash. A company with a moderate payout ratio can still be paying dividends it cannot afford in cash if its profit is not turning into cash; the cash flow statement, not the payout ratio, shows that.
• One year can mislead. A one-off gain lifts profit and lowers the ratio; an impairment does the opposite. A series over several years, ideally with the reasons for changes, is more informative than a single figure.
• It says nothing about direction. A rising ratio can mean profit fell while the dividend was held; a falling ratio can mean profit grew faster than the dividend, or that the dividend was cut less than profit fell.
• It does not measure what you receive. Two companies with the same payout ratio can have very different dividend yields, because yield depends on the share price and the payout ratio does not.
• No level is inherently favourable. A high ratio leaves less for reinvestment; a low ratio may reflect growth plans or caution. Which is appropriate depends on the company, its sector and its stage.
• It is undefined or meaningless when profit is zero or negative. A company that pays a dividend in a loss-making year is paying from reserves, and the ratio cannot express that.

Payout Ratio, Dividend Yield and Dividend Cover

These three are often confused. The payout ratio compares the dividend with profit. Dividend yield compares the dividend with the share price and changes every time the price does. Dividend cover is the payout ratio turned upside down: earnings divided by dividend, expressed as a multiple. The first two describe the company's decision; the yield describes the market's price for it.

Dividend Payout Ratios: FAQs

Does a company have to publish its payout ratio?

No. Companies must report earnings per share and disclose dividends declared, and some state a dividend policy in the annual report, but the ratio itself is something readers compute. Some companies do quote it in their results presentations.

Is the payout ratio calculated before or after withholding tax?

Before. The dividend per share a company declares is the gross figure. Withholding tax is deducted by the registrar when the dividend is paid, and does not enter the ratio. A separate article on this site covers withholding tax on dividends.

What if a company paid a dividend but made a loss?

Then the ratio is not meaningful, because there was no profit for the year to pay it from. The dividend came from retained earnings of earlier years, which the law permits provided the company remains able to pay its debts. The directors' report normally explains the decision.

Does a bonus issue count as a dividend in the ratio?

No. A bonus issue capitalises reserves into new shares and no cash leaves the company, so it is not included. A scrip dividend, where a cash dividend is declared and shareholders may elect shares instead, is included at its cash amount.