eps vs dps

eps vs dps
eps vs dps

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Earnings per share (EPS) and dividends per share (DPS) are both reflections of a company’s profitability, but that’s where any similarities end. Earnings per share is a ratio that gauges how profitable a company is per share of its stock. On the other hand, dividends per share calculates the portion of a company’s earnings that is paid out to shareholders. Both have their uses for investors looking to break down and assess a company’s profitability and outlook.

Earnings per share (EPS) speaks to a company’s profitability and is one of the most popular metrics that analysts point to when evaluating a stock. EPS represents a company’s net income allotted to each share of its common stock. Companies tend to report EPS that is adjusted for extraordinary items and potential share dilution.


Basic EPS is calculated as:

For example, if company ABCWXYZ has 20 million shares outstanding, had a net income of $10 million, and paid out a dividend of $1 million to its preferred stockholders for the last fiscal year, the EPS is 45 cents ($10 million – $1 million) ÷ (20 million shares outstanding).

eps vs dps

There are both basic and diluted EPS. Basic EPS does not factor in the dilutive effect of shares that could be issued by the company. Diluted EPS does. When the capital structure of a company includes stock options, warrants, restricted stock units (RSU), these investments—if exercised—can increase the total number of shares outstanding. The diluted EPS assumes that all shares that could be outstanding have been issued.

DPS is the number of declared dividends issued by a company for every ordinary share outstanding. It is the number of dividends each shareholder of a company receives on a per-share basis. Ordinary shares, or common shares, are the basic voting shares of a corporation. Shareholders are usually allowed one vote per share and do not have any predetermined dividend amounts.

Dividends per share is calculated by dividing the total number of dividends paid out by a company (including interim dividends) over a period of time, by the number of shares outstanding. A company’s DPS is often derived using the dividend paid in the most recent quarter, which is also used to calculate the dividend yield.


DPS can be calculated using the formula:

For example, suppose company XYZ paid $1 million in dividends to its preferred shareholders last year, none of which were special dividends. The company has 5 million shares outstanding, so the DPS for company XYZ is 0.2 per share.

Earnings per share demonstrate how profitable a company is by measuring the net income for each outstanding share of the company.

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  • Earnings per share (EPS) is generally considered to be the single most important variable in determining a share’s price.

    Dividends per share, on the other hand, calculate the portion of the company’s earnings that is paid out to each preferred shareholder. Increasing DPS is a great way for a company to signal strong performance to its shareholders. For this reason, many companies that pay a dividend focus on adding to the DPS.


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    James Chen, CMT is an expert trader, investment adviser, and global market strategist. He has authored books on technical analysis and foreign exchange trading published by John Wiley and Sons and served as a guest expert on CNBC, BloombergTV, Forbes, and Reuters among other financial media.

    Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share outstanding. The figure is calculated by dividing the total dividends paid out by a business, including interim dividends, over a period of time, usually a year, by the number of outstanding ordinary shares issued.

    A company’s DPS is often derived using the dividend paid in the most recent quarter, which is also used to calculate the dividend yield.

    DPS is an important metric to investors because the amount a firm pays out in dividends directly translates to income for the shareholder. It is the most straightforward figure an investor can use to calculate their dividend payments from owning shares of a stock over time.

    eps vs dps

    A consistent increase in DPS over time can also give investors confidence that the company’s management believes that its earnings growth can be sustained.

    DPS

    =

    D

    SD

    S

    where:

    D

    =

    sum of dividends over a period (usually

    a quarter or year)

    SD

    =

    special, one-time dividends in the period

    S

    =

    ordinary shares outstanding for the period

    begin{aligned} &text{DPS} = frac { text{D} – text{SD} }{ text{S} } \ &textbf{where:} \ &text{D} = text{sum of dividends over a period (usually} \ &text{a quarter or year)} \ &text{SD} = text{special, one-time dividends in the period} \ &text{S} = text{ordinary shares outstanding for the period} \ end{aligned}

    ​DPS=SD−SD​where:D=sum of dividends over a period (usuallya quarter or year)SD=special, one-time dividends in the periodS=ordinary shares outstanding for the period​

    Dividends over the entire year, not including any special dividends, must be added together for a proper calculation of DPS, including interim dividends. Special dividends are dividends that are only expected to be issued once and are, therefore, not included. Interim dividends are dividends distributed to shareholders that have been declared and paid before a company has determined its annual earnings.

    If a company has issued common shares during the calculation period, the total number of ordinary shares outstanding is generally calculated using the weighted average of shares over the reporting period, which is the same figure used for earnings per share (EPS).

    For example, assume ABC company paid a total of $237,000 in dividends over the last year, during which there was a special one-time dividend totaling $59,250. ABC has 2 million shares outstanding, so its DPS is ($237,000-$59,250)/2,000,000 = $0.09 per share.

    DPS is related to several financial metrics that take into account a firm’s dividend payments, such as the payout ratio and retention ratio. Given the definition of payout ratio as the proportion of earnings paid out as dividends to shareholders, DPS can be calculated by multiplying a firm’s payout ratio by its earnings per share. A company’s EPS, equal to net income divided by the number of outstanding shares, is often easily accessible via the firm’s income statement. The retention ratio, meanwhile, refers to the opposite of the payout ratio, as it instead measures the proportion of a firm’s earnings retained and therefore not paid out as dividends. 

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  • The idea that the intrinsic value of a stock can be estimated by its future dividends or the value of the cash flows the stock will generate in the future makes up the basis of the dividend discount model. The model typically takes into account the most recent DPS for its calculation.

    Increasing DPS is a good way for a company to signal strong performance to its shareholders. For this reason, many companies that pay a dividend focus on adding to their DPS, so established dividend-paying corporations tend to boast steady DPS growth. Coca-Cola, for example, has paid a quarterly dividend since 1920 and has consistently increased annual DPS since at least 1996 (adjusting for stock splits).

    Similarly, Walmart has upped its annual cash dividend each year since it first declared a $0.05 dividend payout in March 1974. Since 2015, the retail giant has added at least 4 cents each year to its dividend per share, which was raised to $2.08 for Walmart’s FY 2019.

    DPS is an important metric to investors because the amount a firm pays out in dividends directly translates to income for the shareholder. It is the most straightforward figure an investor can use to calculate their dividend payments from owning shares of a stock over time. A consistent increase in DPS over time can also give investors confidence that the company’s management believes that its earnings growth can be sustained.

    Dividends over the entire year, not including any special dividends, must be added together for a proper calculation of DPS, including interim dividends. Special dividends are dividends that are only expected to be issued once and are, therefore, not included. Interim dividends are dividends distributed to shareholders that have been declared and paid before a company has determined its annual earnings. If a company has issued common shares during the calculation period, the total number of ordinary shares outstanding is generally calculated using the weighted average of shares over the reporting period, which is the same figure used for earnings per share (EPS)

    The retention ratio, also called the plowback ratio, is the proportion of earnings kept back in the business as retained earnings. It refers to the percentage of net income that is retained to grow the business, rather than being paid out as dividends. It is the opposite of the payout ratio, which measures the percentage of profit paid out to shareholders as dividends. This metric helps investors determine how much money a company is keeping to reinvest in the company’s operations. Typically, newer companies have high retention ratios as they are investing earnings back into the company to accelerate growth.

    Macrotrends. “Coca-Cola – 56 Year Dividend History | KO.” Accessed Sept. 5, 2021.

    Macrotrends. “Walmart – 31 Year Dividend History | WMT.” Accessed Sep. 5, 2021.


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    What’s DPS? | How do you calculate it step-by-step? | What’s “good”? | Real-life examples?

    Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups.

    You’d use DPS to evaluate stocks to invest in, especially if you prefer companies that pay dividends.

    Or if you already are a shareholder of a company and want to figure out how much of the overall dividend payout of a company you’re entitled to based on how many shares you own.

    For the company itself, declaring dividends and increasing DPS over time is a way to signal strong financial performance to the world.

    eps vs dps

    In summary, these are the top 3 reasons why DPS is so frequently used by investors, shareholders and companies:

    But don’t be fooled, declining DPS–or no dividend at all–is not automatically a red flag signalling financial issues.

    It could just simply be a sign of the company reinvesting funds into the business or avoiding confusing signalling to the market, which are both good things.

    So, because DPS is such an important and widely used investor ratio, this article covers everything you need to know, including:

    Dividend Per Share (DPS) =

    Total Amount of Ordinary Dividends Declared

  • کارگزای مفید
  • ÷

    Total Number of Ordinary Shares Outstanding

    Where the formula variables are defined as:

    For companies that have a consistent dividend payout ratio, which means that they pay a consistent percentage of net profit as dividends, the DPS can be estimated based on their financial statements.

    Dividend Per Share (DPS) =

    Earnings Per Share (EPS)

    x

    Dividend Payout Ratio (DPR)

    Which is equal to:

    Dividend Per Share (DPS) =

    (Net Income ÷ Total Number of Shares Outstanding)

    x

    Dividend Payout Ratio

    In this scenario, DPS can be calculated by multiplying a company’s payout ratio by its earnings per share, where:

    The DPS itself is often used to calculate other dividend related metrics, such as the dividend yield, dividend cover, dividend payout ratio or the dividend discount model.

    In order to calculate the dividend payment that a shareholder receives for each share held–Dividends Per Share (DPS)–follow these simple 3 steps:

    This year, Company X has reported a net income of $2 million. For the same period, the company had 50,000 shares in issue, of which 10,000 is treasury stock.

    Historically, Company X paid out 50% of earnings as dividends to its shareholders, none of which were special dividends. The company is not required to tax the dividend payments at source.

    What dividend per share can the shareholders of Company X expect for that period?

    The dividend per share that the shareholders of Company X can expect to receive is $25.

    Over the last year, Company Y attributed $1,200,000 of its net earnings to shareholders as a dividend, including an interim dividend of $200,000 and a special one-time dividend totalling $100,000.

    While the company had 50,000 common shares outstanding at the beginning of the period, the ending outstanding stock increased to 60,000, because new common shares were issued during the year.

    What is the DPS of Company XYZ for that year?

    The dividend per share of Company XYZ is $20.

    Paying out dividends to shareholders every year and continuously increasing the DPS is a way for a company to signal strong performance to the stock market.

    For example, there is a group of stocks in the S&P 500 index called “Dividend Aristocrats”, which are companies that have raised their dividends for at least 25 consecutive years.

    Corporations like Coca-Cola, Colgate-Palmolive, Target, Walgreens, McDonald’s and Walmart have all experienced more than 40 years of continuous dividend growth.

    On the other hand, Google and Amazon have famously never declared a dividend, even though other tech giants like Microsoft, IBM, Oracle, Intel, Cisco and even Apple have all been paying out dividends to their shareholders.

    So, what is better – high or low DPS?

    eps vs dps

    Why do some companies diligently pay out–and even increase–dividends year-after-year, while others don’t?

    Let’s find out >>>

    The Dividend Per Share is more than just a calculation that determines how much shareholders of a company will get paid in dividends.

    DPS is a widely used financial ratio, which helps investors assess the financial performance, health, stability, as well as long-term growth prospects and shareholder value of a company.

    Generally speaking, the stronger the dividend payouts from a company, the more attractive the stocks are to investors, which may increase their market value.

    But that’s not always the case. Here’s why >>>

    Companies use dividends and DPS to:

    The Dividend Per Share ratio suggests how profitable a company has been over a fiscal period. In other words, the company values its shareholders and has been able to generate enough surplus cash to reward them.

    For some investors, dividends are the key reason to buy stocks. The shares represent an ownership stake in a company and the dividends are the owners’ share of the company’s profits. In fact, many investors enjoy a steady source of income from stocks held in dividend-paying companies.

    Also, dividend payments that are consistent or even growing over time are typically associated with strong financial position, performance and stability. This translates into positive expectations of a company’s growth and future earnings.

    Both the promise of a dividend payout and the perceived financial strength of a company can attract more investors, which in turn increases its market value and stock price.

    Hence, most companies avoid dividend cuts unless their financial condition requires it or the business undergoes some significant change.

    Consequently, a rising DPS is regarded as a positive sign of a company being confident that its earnings growth can be sustained to maintain or improve on the new level of dividend in the future.

    Generally speaking, if a DPS ratio decreases or even disappears over time, it may indicate to the market that the financial health of a company could be deteriorating.

    This in turn can lead to investors selling their stake in the company, driving the market value and stock price of the company down.

    But here comes the twist:

    A DPS ratio with a downward trend does not necessarily mean that a company is in financial difficulties.

    In fact, there are several valid reasons as to why companies do not issue dividends, such as:

    A company may pay a smaller percentage of its net income to stockholders, or decide not to pay out a dividend at all, in the favour or reinvesting its residual profits back into the business.

    This may lead to an increase in the value of the company due to the expansion, with the potential of a higher dividend in the future.

    This approach is common among both mature and rapidly growing companies, for instance:

    When a company reduces or eliminates its dividend policy, the market can regard it as a negative sign.

    Here are 3 ways how companies overcome this problem:

    1. Avoid High Dividend

    Some companies maintain a stable–or only slowly increasing–DPS, by avoiding high dividend payouts even in particularly profitable years.

    2. One-time Special Dividends

    Similarly, companies that are doing well overall but their income fluctuates significantly between periods may prefer not to commit to consistent dividend payouts and increases.

    Instead, they may choose to reward shareholders with one-time special dividends whenever the time is right, which then tend to be more substantial than a typical regular dividend.

    3. No Dividends

    Other companies do not issue dividends at all to avoid this problem completely.

    In fact, some believe that dividends should not actually impact the price of a company stock. This is called dividend irrelevance theory.

    Afterall, the investors can sell part of their stockholding if they are in need of cash.

    In conclusion, the stock with the highest dividend payout is not always the best choice. There is a wide variety of factors that might influence the health of a company and its ability to distribute dividends to its shareholders.

    Therefore, the DPS should be analyzed in conjunction with other financial metrics and non-financial factors to gain a holistic understanding of a company for the purpose of an investment.

    The DPS ratio is often disclosed by companies themselves (e.g., in financial statements or investor materials), so it does not need to be calculated by investors and analysts.

    While this may be convenient, make sure that you understand the basis on which the DPS was calculated (e.g., check the notes to financial statements), especially if you are comparing DPS of different companies against each other.

    Examples of DPS calculation inputs to consider:

    What are the main benefits and disadvantages of the DPS ratio?

    The main difference between Dividend per Share (DPS) and Earnings per Share (EPS) is that the DPS is a proportion of EPS that actually gets paid out to shareholders each year.

    Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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    Some investors look to buy shares of companies that will provide reliable income through sizable and consistent dividends. A company’s dividend per share (DPS) is the total dollar amount of dividends attributed to each individual share outstanding that was paid out to owners of those shares. It can be expressed for a quarter or an annual period.

    Learn what DPS is, how to calculate it, what DPS can tell you about a company, and how DPS differs from earnings per share (EPS).

    To understand DPS, it is necessary to understand dividends. Dividends are cash payments to shareholders that are paid from a company’s profits.

    eps vs dps

    Investors can accept the cash payout or have it automatically reinvested into additional shares of the company in what is known as a dividend reinvestment plan (DRIP).

    Determining a company’s DPS is the most accurate way to determine how much income one can expect to receive from an investment on a per-share basis.

    The majority of companies that pay a dividend do so quarterly. To calculate a company’s DPS, you divide the total amount of dividends paid by the total number of outstanding ordinary shares issued. The formula looks like this:


    DPS = Total Dividends Paid – Any Special Dividends/ Shares Outstanding


    Credit: Dividend Investor

    For example, if a company pays a total dividend of $500,000 and there are 1 million shares outstanding, the DPS would be 500,000 / 1,000,000 = 0.50, or 50 cents per share.

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  • While investors can calculate a company’s DPS themselves, the annual 10-K report issued by most companies via the U.S. Securities and Exchange Commission typically provides that information, along with notes regarding share buybacks and other events that can affect DPS.

    Dividends are usually cash payments made periodically to stock investors, but there are other types.

    If a company has a track record of paying a consistent percentage of its earnings as dividends, it’s possible to estimate what the DPS will be through the company’s income statement. Here are the steps:

    Dividends and DPS are means of measuring a company’s strength. A record of paying consistent dividends or increasing dividends is often interpreted as a sign of positive expectations for future growth. This can attract additional investors and result in an increase in a company’s stock price.

    It is important to note that a company that has consistently paid a percentage of its earnings in dividends may decrease or interrupt dividend payments if business slumps.

    Many companies suspended or cut their dividends in 2020 due to COVID-related slowdowns, including stalwarts such as Harley-Davidson, Disney, and General Motors.

    Another metric investors use to assess the strength of a company and its future prospects is earnings per share (EPS). EPS measures each common share’s profit allocation in relation to the company’s total profit.

    Investors also refer to a company’s dividend payout ratio (DPR), which is the proportion of dividends paid to shareholders in relation to the total amount of net income the company generates. For example, if a company’s net income is $20,000 and it pays $5,000 in dividends, its DPR is 25%.

    A company’s DPR is not necessarily a signal of whether a company is a good or bad investment. Rather, DPR can signify to investors whether a company is likely to provide returns in the form of income (via regular and substantial dividends) or through growth that will hopefully result in a higher share price.

    While both DPS and EPS are reflections of a company’s profitability, only DPS gives an investor a sense of how much income an investment will provide via dividend payments. Here is a look at what each provides.

    Calculating DPS is beneficial to income investors (often retired individuals) who want their investments to provide a steady stream of funds through dividend payments. A company with a dependable or growing DPS over a number of years is an attractive investment for these types of investors.

    A low DPS does not automatically flag concerns about an investment. It may simply mean that the company is instead reinvesting its profits into research and development or other areas that will spur growth, rather than returning money to investors through dividends. Theoretically, this choice will drive more profits, which will result in increased share price.

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    EPS stands for Earning Per Share, which can be calculated by dividing the total earnings (profits) of a company (after tax) by total shares of a company. DPS stands for Dividend Per Share, which is the percentage of EPS that companies pay to shareholders. DPS percentage varies between companies and depends on the company’s policies.


    EPS

    Projected EPS is the profit that a company expects to make by the end of the fiscal year. Companies announce the projected EPS at the beginning of the fiscal year. This value is predicted by the experts, based on the company’s past performance. The projected EPS can be used as one of the indicators of the current price of the company’s share. EPS is one of the tools used for Fundamental Analysis of stock prices.

    DPS

    Most of the time, the DPS values are smaller compared to EPS values because companies keep some of the profit for themselves. Companies keep some of their profits for business development and other activities and distribute the rest between shareholders. However, there are cases that DPS exceeds EPS values when the company distributes some profit from previous years in addition to its profit in the current fiscal year. In the end, the DPS and its distribution policies depend on the company’s policies.

    eps vs dps

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    We see that during its 2012 fiscal year, Wal-Mart stores had sales of $446,950,000,000. That is how much cash the company generated at its checkout lines when consumers walked up to the cash register and handed over currency, used a debit card, or paid by credit card. That is the money that went into Wal-Marts corporate bank account. Using that money, they had to pay the wholesale vendors for the products on the shelves. For example, Procter & Gamble makes Tide laundry detergent. Coca-Cola makes Coca-Cola and Diet Coke. PepsiCo makes Pepsi and Frito-Lay chips. Unilever makes Lipton tea and Ben & Jerrys ice cream. H.J. Heinz makes Heinz ketchup. Hershey Chocolate makes candy bars. Apple makes iPads and iPhones. Those businesses sell the products to Wal-Mart, either directly or indirectly. Wal-Mart needs to keep the store shelves stocked with things people want, otherwise they will have no customers or sales! Last year, Wal-Mart spent $335,127,000,000 of the $446,950,000,000 in cash it generated to pay those wholesale vendors. Wal-Mart also needs to build retail stores, pay for electricity and water, install shelving and display cases, buy computers to track inventory, maintain security cameras, and a host of other activities. These selling, general, and administrative expenses (SG&A expenses) totaled $85,265,000,000. After paying all of those expenses, Wal-Mart stores was left with operating income of $24,398,000,000. However, the business generated $162,000,000 in interest income on its spare cash (money sitting around in the bank or other cash equivalents), but it paid $2,034,000,000 in interest expense on its debt (money it borrowed from bond holders and banks) and $288,000,000 in interest expense on its leases, leaving a net interest expense of $2,160,000,000. Think of that like the interest you pay on your mortgage or a credit card. This left Wal-Mart with pre-tax income from continuing operations of $24,398,000,000. But the government still wants its cut. Wal-Mart had to pay an estimated $7,944,000,000 in taxes to various national, state, and local governments. There are a few other adjustments, but by the time all of the taxes and bills have been paid, the business is left with $15,699,000,000 in net income.

    Understanding What All Of That Means On a Per Share Basis In other words, if you owned 100% of the Wal-Mart Stores company, you would have made $15.699 billion in after-tax profit last year. But there is no 100% owner of Wal-Mart. Instead, Wal-Mart is cut up into 3,474,000,000 pieces that we call shares. Each one of those pieces represents 1/3,474,000,000th ownership of the business. If you owned all 3,474,00,000 shares, you would get to keep all of the profit. What happens is that $15,699,000,000 in profit is divided by the 3,474,000,000 shares to get $4.52. Every piece of the business generated net profit of $4.52 last year. If you owned 100 pieces, or shares, your cut of the net profit was $452. If you owned 100,000 pieces, or shares, your cut was $452,000. That $4.52 figure is referred to as earnings per share, or EPS for short. A share of Wal-Mart Stores is not some mythical thing that fluctuates in value. It is a piece of a business. Right now, the company is split into 3,474,000,000 pieces, called shares, and with $15,699,000,000 in aftertax profits, each piece was entitled to $4.52 in earnings. If you owned all of the pieces, you would get to keep all of the profit. Why does the stock price fluctuate? The owners often offer to buy or sell their shares, among themselves, in an auction that we call the stock exchange. Believe it or not, there are people who actually buy or sell pieces of the businesses without even thinking about the total profit per share they are acquiring, or even thinking about the company at all! Just as you can overpay for a car or get a great deal on a new house, you can pay too much, or get a great bargain, on a piece of the business if you pay attention and only write checks when the shares are available at a price you consider reasonable relative to earnings and assets. A successful business doesnt just pay out all of its profits, though. It has to upgrade stores, keep fresh coats of paint on the outside of the buildings, expand to new locations, launch new products, pay down debt, hire new employees, etc. The people the shareholders elect to represent their best interests are called directors. The directors get together several times a year, and look over how well management has done managing the business. The directors have the power to fire the CEO and put someone new in place if they dont like how the business is being run. Here is the current board of directors for Wal-Mart stores:3

    Those people got together last year and decided that of the $4.52 in net profit each of the 3,474,000,000 shares of the business generated, they were going to mail $1.46 back to the owners, and keep $3.06. The $1.46 that was mailed out is called a dividend. The $3.06 is added to retained earnings on the balance sheet. Wal-Mart follows the policy of paying dividends quarterly (4 times per year), so instead of mailing out $1.46 all at once, they mailed out 36.5 four times in the past twelve months, totaling $1.46. That way, the owners of Wal-Mart have money coming in all the time and dont have to wait an entire year before receiving more cash. The Back Door Dividends Wont Show Up Directly On the Dividend Line Sometimes, the board of directors decides to take some of the money it retained in this case, the $3.06 per share and pay what is sometimes called a back door dividend. They will go to a stock broker and use some of the cash to buy Wal-Mart stock, then destroy it. That way, the business has fewer shares outstanding. With the business being split into fewer shares, each remaining share represents a bigger ownership stake in the business. For example, back in 1998, Wal-Mart Stores was divided into 4,586,000,000 shares. This year, it was divided into only 3,474,000,000 shares. How did the total shares fall by 1,112,000,000? The board of directors kept buying back Wal-Mart stock and destroying it. If they hadnt done that, you would have had to split the $15,699,000,000 in profit by 4,586,000,000 and earnings per share would have been only $3.42, not the $4.52 it was! Each share represents 32% more ownership in the business than it did fifteen years ago. That is all due to stock buybacks. Sometimes, companies can overpay when they buy back stock. Wal-Mart has done a good job of only buying back and destroying shares when they are cheap, because the people who represent the company are very good at business. That means the stock buy backs, or backdoor dividends, have helped make the stockholders much richer than they otherwise would have been.

    How Can Companies Pay Dividends In Years They Lose Money? In essence, this means that an ordinary, normal dividend is paid out of a portion of the net profit a business earns that year. Sometimes, you might see a business have a dividend, but negative earnings per share because it lost money that year. How is it possible? Most businesses have a lot of money put aside in savings, investments, and other assets. They know the owners rely on the income paid out to them, so even if there is a bad year, as long as the future looks bright and things should return to normal, the board of directors may dip into the savings and continue to pay out dividends using past profits to fund them. That cant go on forever. At some point the money will run out and the dividends will stop. Many analysts prefer to see a business that pays out less than 50% of its profits and reinvests the other 50% for growth. One trick people will use is to take the earnings per share and divide it by the dividend rate to calculate something known as the dividend coverage ratio. In the case of Wal-Mart, you had $4.52 in earnings per share, of which $1.46 was paid out as a cash dividend. That means you take $4.52 and divide it by $1.46 to get 3.096. That is a coverage ratio of 3. WalMarts dividend was covered three times. Even if profits were to fall by half, that would drop the coverage ratio down to 1.5, so the dividend would probably still be safe. How to Approach This From the Perspective of an Outside Investor When you think about investing in shares of Wal-Mart, what you are really doing is buying a piece of the business. Every share you buy gives you 1/3,474,000,000th of the corporation. As of last year, that meant you were entitled to $4.52 in after-tax net earnings (EPS), of which $1.46 was mailed to you as a dividend and $3.06 was retained by the board of directors to give to management for the purpose of growing the business, buying back stock, or doing other (you hope) intelligent things. That is why you cant answer the question, Is Wal-Mart a good investment?. The price you pay matters! You have to know enough about the business to look out in the future 5 or 10 years and reasonably come up with a guess as to what the earnings per share will be, then compare that to the price you are paying today. Sometimes, a stock that looks expensive now is really very cheap because profits are about to skyrocket. Other times, a stock that looks cheap is really very expensive because profits are about to plummet.

    At current earnings levels, for someone thinking about holding for 10+ years, Wal-Mart might be a phenomenal investment at $25 a share and a poor investment at $150 per share. It might be a fair investment around $60 per share. That is because I am still getting the same thing $4.52 in profit in earnings now, plus all future years of profit on top of that. The less I pay for that profit, the higher my return. The more I pay for that profit, the lower my return. Human nature being what it is, from time to time typically every 10 to 20 years investors either panic, and sell all of their ownership stakes for ridiculously low prices, or get stupidly optimistic and keep buying at everhigher prices that are no longer attached to reality. Stocks are not lottery tickets. They are pieces of ownership in an enterprise. You want to buy a collection of assets that will be making more and more money with each passing year, even if the stock itself falls substantially. In the meantime, you sit back and collect the cash that gets mailed to you. I do not measure the success of my portfolio by the market liquidation value at any moment; I focus on making sure my share of the net earnings and cash dividends grows at a rate must faster than inflation, adjusting for new capital additions. I hope that helps.


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