Payout Ratio
The percentage of a company's net income paid out as dividends to shareholders.
What is Payout Ratio?
The dividend payout ratio measures the proportion of net income a company distributes to shareholders as dividends, calculated as dividends per share divided by earnings per share (or total dividends divided by net income). A high payout ratio (above 75%) may indicate limited reinvestment for growth or potential dividend sustainability concerns; a low payout ratio (below 30%) suggests a company retains most earnings for reinvestment. Mature, slow-growth companies (utilities, consumer staples) typically have high payout ratios; high-growth companies often pay no dividend at all, reinvesting all earnings. The sustainable payout ratio depends on the consistency of earnings and the capital needs of the business.
Example
Coca-Cola pays $1.94/share annually in dividends and earns approximately $2.50/share in EPS. Payout ratio = $1.94 / $2.50 = 77.6%. This high payout ratio is sustainable for Coca-Cola because of its stable, predictable earnings — but the same ratio would be concerning for a cyclical company whose earnings fluctuate significantly.
Source: Coca-Cola 10-K FY2024