The Pay-Out ratio is the percentage that a company allocates of the profits to the distribution of dividends. That is, it is the part of the profit that is distributed in dividends.
Viewed another way, it is the dividend per share that a company pays to its shareholders divided by the company's earnings per share as a percentage.
Its calculation formula, therefore, is related to the payment of dividends of the company in this way:
Dividend = Net Profit * Payout
Where the PayOut Ratio is from:
Payout = Dividend / Net profit
Payout = Dividend per share / Net earnings per share
Effects of a high pay-out ratio
A high Pay-Out generates an attraction effect among investors since the dividend distribution policy will be higher in profitability or frequency. In this way, it allows a faster development of the company because it attracts more financing to carry out investment projects or pay off its debt and improve its cash flow structure and new business.
The good management of the company will depend solely and exclusively if a positive Pay-Out brings benefits.
On the other hand, this effect generates liquidity in investors (from the point of view that the company remunerates them and collects the dividend), and this allows them to make investment decisions outside the company and, therefore, they are not reversed in this one again.
A sector with a high pay-out is electricity and banking.
Effects of a low pay-out ratio
A low Pay-Out does not have to be bad at all, what it shows us is that the company can reinvest these dividends in order to capitalize it and generate greater financial solvency. In turn, it will allow a slow and sustained development over time and perhaps a high valuation of its price in the long term.
One sector with a low pay-out is construction.
The perfect situation for a company in the face of the investor is that it pays a high dividend and continues to be self-financing.
Pay-Out calculation example
A company has obtained a profit of 100 million euros in a year and allocates 60 million to the distribution of dividends among its shareholders, initially, the pay-out of this company will be 60 percent.
But if in that same year he has entered 40 million euros and the profits have become 140 million from the sale of his shares in another company and he allocates this extraordinary contribution to dividends, the company's pay-out will amount to 71 per cent (the initial 60 million plus the extraordinary 40).
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