28 Sep 591 Wk5 Db2 Res1
For potential stockholders of a company, it is important to first understand the company of interest prior to investing in it. One thing that should be assessed is the performance of the company. Stockholders should pay close attention to the dividend payout ratio and the return on equity ratio but they should only compare a company’s dividend payout ratio with similar companies to get an accurate understanding. As per Kimmel, Weygandt, and Kieso (2019), the dividend payout ratio “measures the percentage of earnings a company distributes in the form of cash dividends in common stockholders”. The dividend payout ratio can be used to identify the portion of a company’s annual earnings per share that is being paid in the form of cash dividends per share. In order to calculate the payout ratio, total cash dividends declared to common shareholders is divided by net income. Companies try to set their dividend rate at a sustainable level and most commonly, companies are considered stable if they pay out less than 50% of its earnings in the form of dividends (Hanlon & Hoopes, 2014). Stable companies have the potential to raise earnings over the long term. On the other hand, companies that pay out more than 50% likely won’t raise dividend payouts as much as companies with lower dividend payout ratios. Furthermore, companies with high dividend payout ratios could have difficulties maintaining dividends over the long term. The most recent data from Colgate Palmolive Co., per June 30 2019 Quarter II, indicates an earnings per share of $0.68, dividends of $.047, and a payout ratio of 68.97%. Based on these statistics, I would not invest in Colgate because the payout ratio is too high. I don’t have faith that the company would perform well over the long term.
References:
Colgate (Links to an external site.). (www.colgate.com)
Hanlon, M. & Hoopes, J. L. (2014). What Do Firms Do When Dividend Tax Rates Change? An Examination of Alternative Payout Responses to Dividend Tax Rate Changes. Journal of Financial Economics, 114(1), 105-124.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2019). Retrieved from
Respond to…
I reveiwd Colgate’s Annual Report off their website to calculate the dividend payouts ratio and return on common stockholders’ equity.
Dividend payout ratio
Cash dividends declared on common stock/net income.
{$1.339 (million)}/$1.384 9million)=97%
Return on common stockholders’ equity
(Net income-Preferred dividends)/(Average common stockholders’s equity)
($1.384 (million)=$0) / { ((299) + 1.145)/2} – $1.384 (million) / 423=3.27-327%
These ratios line up with the statements on Colgate’s website. : “Colgate Palmolive has paid uninterrupted dividends on its common stock since 1895 and had increased payments to common shareholders every year for 54 years.” Also the total shareholders return in the last 20 years us +1168%. The return on common stockholders’ equity tell you how many dollars of net income have been earned for each dollar that was invested by common stockholders. With a return of 32% that means the investors are more than tripling their money.
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