Difference Between Dividends and Earnings Per Share

Dividends vs Earnings Per Share | EPS vs Dividend
 

Earnings per share and dividends per share are both financial ratios that a firm calculates in order to obtain an understanding regarding the stock’s future prospects for its shareholders. Earnings per share and dividends per share are easily confused by many. This is because earnings per share is viewed as the earnings that shareholders obtain for a share, when actually, it is the number of net income allocated per share. The following article aims to provide the reader a clear explanation of what is meant by earnings per share and dividends per share, and clearly explain the difference between the two.

What is Dividend

Dividends per share refers to the amount per share that shareholders receive as dividends. Dividends that a shareholder receives is a portion of the company’s total profit that is kept aside for the very purpose. In the event that a firm makes a profit they can make a decision between reinvesting the excess funds back into the firm to use for business purposes, or they can pay out dividends to shareholders using the surplus. A company is not under obligation to make dividends payments, if they have a better use for the excess funds. It is important to note that firms that have very high rates of growth, rarely pay dividends, as they use the funds for reinvestment purposes. The reward that the shareholder obtains is the increments to the share’s market price. Dividends per share are usually quoted as the number of dollars per share, or can be shown as a percentage of the market price, which is the corporation’s dividend yield.

What is Earnings per Share (EPS)

Earnings per share figure is calculated as follows. Basic EPS = (Net Income – Preference dividend) / number of shares outstanding. Earnings per share measures the number of dollars of net income that is available for one of the company’s outstanding shares. The basic earnings per share is a measure of profitability and is considered to be an important determinant of a share’s true price. Basic earnings per share is also used in other important financial ratio calculations such the price-earnings ratio. It must be noted that two companies could generate similar EPS figures, but one firm may do so by using less equity, which would make the firm more efficient than the firm that issues more shares and arrives at the same EPS.

What is the difference between Earnings per Share (EPS) and Dividend?

Earnings per share and dividends per share both indicate the future prospects of the firm in terms of shareholder’s return and income allocated per shareholder. However, the two are different from each other in that earnings per share measures the $ value of net income that is available for each of the company’s outstanding shares, and dividends per share shows the portion of profits that is paid out as dividends per share. The value of earnings per share will give the investor an idea of the value of dividends to expect, as dividends are a portion of the company’s net earnings that are distributed to shareholders. The earnings per share measures a firm’s profitability, and the higher the EPS the better. However, higher dividends per share may indicate that the firm cannot reinvest enough funds back into the firm; therefore, distributing those funds. This must be considered in light with the fact that a firm with very high growth rates usually reinvest surplus income, instead of paying dividends.