Payout ratio

The payout ratio is the declared dividend payment divided by the financial result of the same period. The ratio answers one question: what part of its earnings the company handed to shareholders and what part it kept for itself — for growth, debt repayment or reserves. The remainder that did not go to dividends is called the retention ratio: together these two shares account for the whole result of the period.

Which result is being divided

The value of the ratio is determined almost entirely by the choice of denominator, and this is exactly where calculations from different sources diverge. The denominator may be net income under international standards, profit under Russian accounting standards, adjusted profit excluding one-off items, or free cash flow — the last option is described separately in dividends based on cash flow. Different bases produce different ratios for the very same payment, so a payout figure should only be read together with a statement of its base. Many issuers have the choice formally fixed: the dividend policy names the base and the target share outright, while distributable profit explains what part of the result is available for distribution at all under corporate law.

The numerator calls for care as well. If there were several payments during the year, the calculation uses their sum — that is, the annual dividend, not a single interim payment, otherwise the ratio will be understated. Special payments out of past accumulations distort the picture in the opposite direction.

An example using the platform's data

The denominator of the ratio is the result of the period. For Sberbank this is net income:

491 000 000 000

Dividing the full amount of dividends declared for the year by this figure gives the payout ratio on net income; a closely related measure built on the reverse logic is dividend cover, where profit is divided by the payment.

Where the indicator misleads

The payout ratio is meaningless for a loss-making period: with a negative denominator the ratio is either negative or cannot be calculated at all, even though a payment may still be declared out of retained earnings from previous years. The second failure mode is a holding company that lives on receipts from its subsidiaries: the group's consolidated profit and the cash actually available to the parent company diverge, and the explanation for this is in dividends from subsidiaries.

A common substitution is reading the payout ratio as a measure of how attractive the payment is. The ratio describes the company's behaviour in relation to its profit, not the shareholder's return on each rouble invested: the latter is measured by dividend yield. A low payout at a growing business and a low payout at a company that is winding down its payments look the same, and only the trend helps to tell them apart — dividend growth and payment history.