The dividends per share, or DPS, figure provides investors an estimate of the cash return they can expect from investments in a given company. Calculating DPS requires that a company discloses certain financial information: dividends announced for a particular period and the total number of ordinary shares outstanding at the time of the announcement. With these figures, an investor can calculate DPS and compare the figure to the DPS for companies in the same industry.
The DPS calculation uses the following formula: DPS equals announced dividends divided by total shares outstanding. To illustrate, Company A announces dividends of $1.2 million on 9 million outstanding shares. Substituting the figures in the equation, DPS equals $1.2 million divided by 9 million, or $0.14. Note that a DPS figure is typically given in cents.
The DPS is a useful figure because it allows for direct comparison of a key indicator of a business's financial health. That is, the DPS allows the investor to compare businesses of different sizes by focusing on a single figure that reflects real-world cash returns independent of business size. A business's gross earnings, for example, can be heavily dependent on its size, but a higher gross earnings figure need not translate into a higher return on investment for the investor if the business also incurs correspondingly higher expenses.
While the DPS figure itself is an apples-to-apples comparison between different businesses, the figure does not take into account the stock value of the shares of the business. A share in Company A may have a DPS of $0.14, and a share in Company B a DPS of $0.15, but the stock value of a share in Company A might be, for example, $18, while the stock value of a share in Company B might be $55. While the differences in the stock value do not change the respective DPS figures, the different values may influence the investor's decision making in other ways.
The particular figures used to calculate DPS may vary. Some investors may prefer to look at net profit after tax (NPAT) less retained earnings (RE) rather than announced dividends. As long as the investor uses the same set of figures to calculate the DPS for each business in a closed set, the comparison remains valid.
As with most measures of financial health, past DPS figures for a business do not guarantee future DPS figures.
- Photo Credit "Lincoln Wheat" is Copyrighted by Flickr user: trazomfreak (Amanda Yepiz) under the Creative Commons Attribution license.
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