The dividend per share is defined as the total of declared dividends for each share of stock issued. Dividends are essentially profit-sharing mechanisms allowing the distribution of company profits to the shareholders who actually own the company. Generally announced on a quarterly basis, the dividend per share is important both to shareholders who expect to realize financial gain from dividends paid and to financial analysts and investment brokers who often use the dividend per share as an indicator of a company’s overall financial profitability. Although dividends per share are typically announced quarterly, investors and analysts rely on the annual dividend per share figure as a more reliable indicator of economic health.
The general method used to calculate dividend per share is relatively straightforward. The sum of dividends for a defined period (usually one year) is determined, with any special dividends subtracted from this total, and then divided by the number of shares of stock outstanding. The formula is expressed thusly:
• Dividend per share = (Sum of all dividends – special dividends) / total number of outstanding shares
Dividends per share exclude special dividends because they are considered one-time events and not indicative of general company performance.
For potential investors, the dividend per share figure is a significant indicator of the current ability of a company to produce value for its shareholders. Historical data on dividends per share can produce a remarkably clear picture of a company’s financial background and current situation. Low dividend per share figures, however, may not be indicative of poor performance or unprofitable company operations. Other causes include reinvestment into core business assets and paying down of debt; each of these can produce higher dividends in the long run and are considered to be conservative financial management methods.
Dividend earnings per share
Calculating the dividend earnings per share is slightly more complex, but can be achieved by subtracting the dividends on preferred stock from net income and dividing the resulting figure by the total number of outstanding common shares of corporate stock. (In some cases, the average number of shares is used rather than the total number; this is especially useful during highly volatile market conditions.) The formula used to calculate dividend earnings per share can be expressed thusly:
• Dividend Earnings Per Share = (Net Income – Preferred Stock Dividends) / Total Number of Outstanding Common Shares
The resulting figure is used to determine a company’s current economic value. However, as with other dividend per share figures, reinvestment and debt reduction may lower the dividend earnings per share without negatively affecting the company’s overall profitability; it is necessary to consider a number of factors rather than basing an assessment solely on dividend per share figures.
Dividend per share announcements typically include a record date on which the dividends will actually be paid to shareholders. Shortly before the record date, the ex-dividend date denotes the date on which any dividends due will remain with the seller rather than be transferred to the buyer upon sale; this makes the ex-dividend date of crucial importance for stock speculators who may purchase stocks solely to obtain projected dividends.
