The payout ratio is a financial metric that shows what portion of a company’s earnings is paid out to shareholders as dividends. It is expressed as a percentage and is commonly used to evaluate the sustainability of a company’s dividend payments.
In simple terms, the payout ratio answers the question:
“How much of the company’s profits are being returned to shareholders versus kept for the business?”
How Payout Ratio Is Calculated
The most common formula for payout ratio is:
Payout Ratio = (Dividends per Share ÷ Earnings per Share) × 100
It can also be calculated using total figures:
Payout Ratio = (Total Dividends ÷ Net Income) × 100
Both approaches measure the same concept—how much profit is distributed as dividends.
Example:Assume a Philippine-listed company reports the following for the year:
- Earnings per share - ₱10.00
- Annual dividends per share - ₱4.00
Payout Ratio = (₱4.00 ÷ ₱10.00) × 100 = 40%
This means the company distributed 40% of its earnings as dividends and retained the remaining 60% for operations, debt reduction, or expansion.
A payout ratio of this level is often viewed as balanced, assuming earnings are stable.
Philippine Stock Market Context
For Philippine stocks, payout ratios vary significantly by sector and company maturity.
General observations in the local market:
- Banks and holding companies – Often maintain moderate payout ratios to preserve capital and meet regulatory requirements.
- Utilities and REITs – Tend to have higher payout ratios due to stable cash flows and income-focused business models.
- Growth-oriented companies – Usually have low payout ratios or pay no dividends at all, preferring to reinvest earnings.
For Philippine investors, payout ratio is particularly important because many local companies do not follow rigid dividend policies and may adjust dividends based on annual performance.
What Is a "Good" Payout Ratio?
There is no universal "ideal" payout ratio. What is considered reasonable depends on the company’s industry, earnings stability, and growth strategy.
As a general reference:
- Low payout ratio (below 30%) - Indicates strong reinvestment focus or conservative dividend policy.
- Moderate payout ratio (30%–60%) - Often suggests a balance between dividends and business growth.
- High payout ratio (above 60%) - May indicate strong income orientation, but also higher risk if earnings decline.
In the PSE, consistently high payout ratios deserve closer scrutiny, especially when earnings are volatile.
Payout Ratio vs. Dividend Yield
Payout ratio and dividend yield measure different aspects of dividend investing.
- Payout ratio - Focuses on dividends relative to earnings.
- Dividend yield - Focuses on dividends relative to stock price.
A stock can have a high dividend yield but low payout ratio if earnings are strong and the stock is undervalued.
A stock can have a low dividend yield but high payout ratio if earnings are weak and most profits are being distributed.
For Philippine investors, payout ratio is often the better indicator of dividend sustainability, while dividend yield reflects current income attractiveness.
High Payout Ratio: Strength or Risk?
A high payout ratio is not automatically negative, but it does carry implications.
Possible positive reasons:
- Stable earnings - Predictable profit generation.
- Mature business - Limited expansion needs.
- Strong cash flows - Ability to support regular dividends.
Potential risks:
- Limited buffer - Less room during earnings downturns.
- Dividend cuts - Higher likelihood if profits fall.
- Reduced growth funding - Fewer internally funded investments.
In the Philippine context, companies with fluctuating earnings and high payout ratios are more vulnerable during economic slowdowns.
Payout Ratio and Cash Flow
While payout ratio is based on earnings, dividends are paid using cash.
A company may report profits but still face cash flow constraints. This is why payout ratio should ideally be reviewed together with operating cash flow, free cash flow, and debt levels.
This consideration is especially relevant for Philippine companies with capital-intensive operations.
Common Investor Mistakes
- Assuming high payout ratios are always bad - Some stable businesses are designed to return most of their earnings.
- Ignoring earnings quality - One-time profits can distort payout ratio calculations.
- Focusing only on dividend yield - Yield without payout context can be misleading.
- Overlooking earnings volatility - Inconsistent profits make high payout ratios riskier.
Payout Ratio in Dividend-Focused Strategies
For dividend investors in the Philippines, payout ratio is commonly used to assess dividend sustainability, compare dividend-paying stocks within the same sector, identify companies with room to grow dividends, and avoid dividend traps caused by temporary high yields.
Payout ratio is most effective when analyzed alongside dividend history and earnings consistency.
Common Questions
Is a low payout ratio always better?
No. A very low payout ratio may indicate that the company prioritizes growth over income, which may not suit income-focused investors.
Can a company pay dividends with a payout ratio above 100%?
Yes, temporarily. This usually means dividends exceed current earnings and may be funded by retained earnings or cash reserves, which is not sustainable long-term.
Does payout ratio apply to all companies?
It is most useful for profitable, dividend-paying companies. Loss-making firms do not have meaningful payout ratios.
Is payout ratio more important than dividend yield?
They serve different purposes. Payout ratio helps assess sustainability, while dividend yield reflects current income return.
Can payout ratio change even if dividends stay the same?
Yes. Payout ratio can change if earnings rise or fall. If earnings decline while dividends remain unchanged, the payout ratio will increase, signaling higher pressure on sustainability.