Dividend Payout Ratio

This ratio measures what a company pays out to its investors in the form of dividend. This is the ratio between dividends and earnings. It indicates the portion of current earnings per common share being paid out in dividends. Thus,

Or, 

This ratio is very important from the shareholders' point of view. If a company pays whole or substantially the whole of its earnings for paying dividends and retains nothing for future growth and expansion, then the chances of capital appreciation are dim. Hence, a shareholder looking for quick returns looks for companies whose dividend payout ratio is high while investors looking for capital appreciation look for companies whose payout is low.

This ratio can be calculated by taking diluted earnings per share from a conservative view point. Also, for a stable dividend policy, the non-recurring items are not to be considered.

There is no thumb rule for a correct dividend payout ratio. Growth companies generally retain more profits to fund its growth plans and pay less dividends, on the hand companies belonging to industries which have reached matured stage and have little room for growth may pay high dividends. This ratio reflects on the policy of the company. A high payout ratio signifies liberal policy and a low payout ratio signifies conservative policy. Companies usually hesitate to decrease dividends since they have an adverse effect on the market price.

Calculation of Dividend Ratio of Infosys Technologies Ltd. for the years 2006-07and 2005-06 is given below:

Special dividend is not a normal item. Thus, while calculating dividend payout ratio, special dividend and tax on this special dividend should not be taken into account in 2005-06

         Dividend Tax on Normal Dividend = Rs.174 x (Rs.411/Rs.1238) = Rs.58 crore.

Infosys is paying around 20% in their earnings as dividend. It was approximately increased by 0.5 % compared to the last year.  Software industry's dividend payout ratio is normally 41.65%. Compared to the industry, the company is paying less dividends to investors. But it has paid special dividend this year as 2005-06 happens to be their silver jubilee year. 

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