Dealing with Employees/FINANCIAL MANAGEMENT.
high dividend payout ratio goesin hand with high price earnings ratio andlow dividend ratio goes hand in hand with low price earnings ratio.Comment your views on this subject elaborately.
3. “High dividend payout ratio goes in hand with high price earnings ratio and low
dividend payout ratio goes hand in hand with low price earnings ratio.”
Comment your views on this statement elobrately.
The percentage of earnings paid to shareholders in dividends.
- A reduction in dividends paid is looked poorly upon by investors, and the stock price usually depreciates as investors seek other dividend-paying stocks.
- A stable dividend payout ratio indicates a solid dividend policy by the company's board of directors.
The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio.
High dividend payout ratio goes in hand with high price earnings ratio and low
dividend payout ratio goes hand in hand with low price earnings ratio
Benefits of Low Payout Ratios
In many situations, you should be happy to find low payout ratios. If you’re investing in a company, you’ll want its leaders to make wise decisions with the company’s profits. When a company pays a dividend, the profits are no longer at the disposal of the company. Holding on to some cash, instead of paying everything out, allows a business to:
• Invest in more efficient technology and machinery
• Hire additional staff and expand skill sets
• Prepare for economic uncertainty
• Operate effectively in bad economic environments
• Maintain consistent, stable dividend payments over short- and long-term periods
• Take advantage of high-growth opportunities like new product lines
• Consider attractive acquisition properties
• Invest in affordable real estate or new facilities
When a company retains a large percentage of quarterly or yearly earnings and uses the money to invest in growth, you can expect the value of the stock to climb. And that increased value will be more lucrative than a slightly higher dividend payment. But companies that have a policy of overpaying dividends don’t have enough liquidity to take advantage of such opportunities. A low payout ratio, therefore, saves the company from these undesirable options:
• Passing up valuable opportunities and losing out on the potential gains
• Selling debt bonds, which the company would need to repay along with any accrued interest
• Selling more equity shares, which lowers the value of your shares
• Raising capital by suspending dividends altogether
In short, lower payout ratios allow companies to consistently reward investors and maintain valuable growth. In the end, this business practice should lead to a continually rising stock price, providing more long-term value than quick bursts of higher dividend payments. Plus, you won’t be subject to fluctuation – or cancellation – of your dividend payments.
If you want your dividend-yielding company to have enough money to reinvest for decent growth and to maintain a stable dividend, look for payout ratios less than 50%.
Benefits (and Cautions) of High Payout Ratios
Of course, a high payout ratio seems to have an obvious benefit: a nice big check one to four times per year. And that payout is a more legitimate cause for celebration if it doesn’t come at the expense of hindering growth. What if you invested in a large and efficient company that generated huge piles of cash, but the business had already achieved market saturation? The company won’t benefit as much from hoarding cash when no further growth opportunities exist, so large-value stocks with little expected growth opportunities are good candidates for a high payout ratio.
A large-value company should still exhibit some discretion to avoid trouble in a recession or from an unexpected hit to its business model, but these businesses can still afford a much higher payout ratio than comparably smaller companies.
High payout ratios have more obvious benefits, making due diligence more crucial. If you see a large-value company that has significant cash reserves but doesn’t have room for growth, make sure they either maintain a high dividend payment ratio or have a reason to hold on to that cash. If they don’t justify the cash reserves, be wary about investing in that company. It’s possible that management has insider knowledge of some future turbulence that will hurt the company, or perhaps management wants to pay its cash out to themselves in the form of higher bonuses.