Study Notes: Business Finance & Accounting

Shareholder ratios

A prime concern of shareholders is their return on investment.  The returns from investing in shares of a company come in two main forms:

• The payment of dividends out of profits
• The increase in the value of the shares (share price) compared with the price that the shareholder originally paid for the shares

Dividend per share

One very straightforward shareholder ratio (though as we shall see – not a hugely helpful one) is dividend per share.

This shows the value of the total dividend per issued share for the financial year.  Quoted public companies usually split the annual dividend into two payments – the “interim” (paid after six months trading) and the “final” (paid at the end of the financial year). In these cases, it is necessary to add the two dividend payments together.

The formula for dividend per share is:

To illustrate the calculation, let us assume that a firm paid out the following dividends

• 2009: £460,000
• 2008: £240,000
• In both years, there were 500,000 £1 ordinary shares in issue which qualified to receive a dividend

The dividend per share would be:

• 2009: £460,000 / 500,000 shares = £0.92 (or 92p) per share
• 2008: £240,000 / 500,000 shares = £0.48 (or 48p) per share

An ordinary shareholder would probably be pleased with the higher dividend per share in 2009 compared with 2008.

However, the problem with dividend per share is that the ratio lacks a sensible context.  We don’t know:

• How much the shareholder paid for the shares – i.e. what the dividend means in terms of a return on investment
• How much profit per share was earned which might have been distributed as a dividend

Dividend yield

Dividend yield is a better shareholder ratio to use to get a sense for the rate of return on investment. The formula for dividend yield is:

To illustrate the calculation, consider this information:

• A firm declared the following dividend payments:  92p (2009) and 48p (2008)
• The average share price for 1 ordinary share of the company on the Stock Exchange during those financial years was 1415p (2009) and 1067p (2008)

Using the formula, the dividend yield would be:

• 92/1415 for 2009 = 6.5%
• 48/1067 for 2008 = 4.5%

So the dividend yield in 2009 increased, which is good news for shareholders since that represents an increase in their return on investment.

A dividend yield of 6.5% would seem to be a good return in a period of low interest rates and low returns on savings accounts.  What we don’t know if whether the shareholders consider it to be an acceptable return for the perceived risk investing in the shares of the business.