Study Notes

Shareholder Returns

Level:
AS, A-Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Shareholders are the owners of a limited company and they gain their financial reward from share ownership in two ways:

  • A share of the profits earned by the company – paid out as a dividend
  • Growth in the value of their shareholding (compared with the cost of buying the shares) – which is "realised" when the shareholder sells the shares to someone else

The vast majority of limited companies are "private" in that their shares are not publicly traded on a regulated stock market. However, that does not stop the shareholders of private limited companies from buying and selling shares privately.

Shareholders in public companies whose shares are traded on the Stock Exchange have a daily insight into the returns their investment is making:

  • The share price indicates the market value of the business (share price x number of shares in issue)
  • The latest share price can be shown as a multiple of the most recent annual earnings (or profits) per share, to show a valuation ratio known as the Price/Earnings (or P/E) ratio
  • The latest annual dividend can be compared with the share price to indicate an annual return ("dividend yield")

The financial objectives that a public company might, therefore, set in relation to shareholder returns might include:

  • Target growth in the share price
  • Increases in the dividend per share over time
  • Increases in earnings per share

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