Shareholder Ratios

Notes on shareholder ratios for A2 Business Studies.

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  • Created by: Emma Rudd
  • Created on: 25-03-08 16:29
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Lindsay Emma Rudd BMA
Shareholder Ratios
The results of this group of ratios are of particular interest for shareholders of a company or to anyone
considering purchasing shares in a particular company. Shareholders can receive a return on their
purchase of shares in two ways
1. Through dividends paid from the companies profits over the financial year.
2. As a result of a rise in the price of shares called a capital gain.
Dividends offer a short term return on an investment and may be of interest to shareholders seeking a
quick return. However other shareholders may seek a long term return on their investment. They may be
prepared to forgo high levels of dividends in the short run to allow profits to be invested. They hope that the
business will grow, increasing the price of shares and providing a capital gain for shareholders.
There are a number of ratios that may be used by shareholders. However the main ratios are ones that
compare the dividends received against the capital investment made by the shareholders when they
purchased the shares.
Dividend per Share
It is simply the total dividend declared by a company divided by the number of shares the business has
issued.
Dividend per Share = Total Dividends
Number of Shares Issued
Results of this ratio are expressed as a number of pence per share. It is normal for dividends to be paid in
two parts an interim dividend halfway through the financial year and a final dividend at the end of the year.
Using this Ratio
A higher figure is generally preferable to a lower one as this provides the shareholders with a large
return on their investment. However some shareholders are looking for long term investments and
may prefer to have a lower dividend per share now in the hope of greater returns in the future and the
share price rising.
It is wise to compare the dividend per share with that offered by alternative companies. However it is
also important to bear in mind how much has to be invested to buy each share. A low dividend per
share may be perfectly acceptable if the company has a low share price.
A business can improve this figure by announcing higher dividends (and therefore reducing the
amount of profit retained within the business). This may prove attractive to some shareholders, but
may not be in the long term interests of the business, particularly if profits are not rising.
Dividend Yield
This ratio is really a development of the previous ratio and provides shareholders with more information.
The dividend yield compares the dividend received on a single share with the current market price of that
share. This provides shareholders with a better guide to a business's performance as it compares the
return with the amount that would need to be invested to purchase a share. The result of calculating this
ratio is given as a percentage.
Dividend Yield = Dividend per Share X100
Market Price of Share
Using this Ratio
A higher return will be regarded as preferable by shareholders seeking a quick return. Longer term
investors might settle for a lower figure, allowing the firm to reinvest profits and offering the
possibility of higher profits and dividends in the future.
Results for this ratio can vary dramatically according to fluctuations in the company's share price
The ratio can be improved by increasing the proportion of profits distributed to shareholders in the
form of dividends.
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