When computing the total payout ratio, common stock dividends plus common stock repurchases are included in the numerator.

Question

Quizplus · Accepted Answer

The total payout ratio is a financial metric used to evaluate how much of a company's earnings are being returned to shareholders in the form of dividends and share repurchases. To compute the total payout ratio, you would follow these steps:1. Determine the total amount of dividends paid to common stockholders during a specific period. This information can typically be found in the company's cash flow statement or notes to the financial statements.
2. Identify the total amount spent on repurchasing common stock during the same period. This information is also usually disclosed in the cash flow statement or in the equity section of the balance sheet as a reduction in the number of shares outstanding.
3. Add the common stock dividends and the common stock repurchases together to get the numerator of the total payout ratio.
4. Calculate the company's net income for the same period, which serves as the denominator of the total payout ratio. Net income is found on the company's income statement.
5. Divide the sum of common stock dividends and repurchases (the numerator) by the net income (the denominator) to get the total payout ratio.
The formula for the total payout ratio is:
Total Payout Ratio = (Common Stock Dividends + Common Stock Repurchases) / Net Income
This ratio provides insight into how much of the company's profits are being used to reward shareholders and can indicate the company's dividend and buyback policies. A higher total payout ratio might suggest that the company is returning a significant portion of its earnings to shareholders, which could be seen as a positive sign by investors seeking income. However, it could also raise questions about whether the company is retaining enough earnings to fund future growth.

When Computing the Total Payout Ratio, Common Stock Dividends Plus