A payout ratio is the percentage of net income a company pays out to shareholders as a dividend. If Buzzy's Broccoli Beer (ticker: BRRRP) pays $1 per year in dividends and sports earnings per share (EPS) of $4, its payout ratio is 25%. ($1 divided by $4 equals 0.25, or 25%.)
This shows what the company is doing with its money. If you see that a company is returning 75% of its earnings to shareholders, then little is being reinvested in operations. That can be OK, since sometimes reinvested earnings would return less than shareholders could get by investing the payout on their own. But in general, a high payout ratio means you probably shouldn't expect rapid growth at the company. Also, high ratios give a company little wiggle room. If a company is paying out 90% of its income as dividends and its income suddenly drops, it may have to cut back its dividend, which companies try like heck not to do, since it alarms and annoys investors.
Here are a few recent payout ratios:
| Company | Payout Ratio |
|---|---|
| Microsoft (NASDAQ:MSFT) | 18% |
| Wal-Mart (NYSE:WMT) | 23% |
| ExxonMobil (NYSE:XOM) | 23% |
| McDonald's (NYSE:MCD) | 31% |
| Coca-Cola (NYSE:KO) | 50% |
| General Electric (NYSE:GE) | 52% |
| Altria Group (NYSE:MO) | 56% |
Learn more about investing in companies by going to our Investing Basics area. Also, check out our Mutual Fund area, and zero in on our index fund information there. We've got more thoughts on dividend payouts in this article by Tom Jacobs.
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Coca-Cola is a Motley Fool Inside Value recommendation.
