Q. Calculate the earnings per share?
Dividend cover is a measure of the relationship among dividends and earnings and may be calculated for the whole company or on a per share basis but both methods will yield the same results. In order to compute the dividend cover from the information given it is first necessary to calculate the earnings per share.
A value for earnings per share is able to be obtained from the P/E ratio and current share price since the share price is the EPS multiplied by the P/E ratio. Applying a few simple algebra P/E = Share price/EPS
And therefore EPS = Share price/P/E ratio
For Spin this means EPS = 187/21·1= 8·86 cents.
For Axis this means EPS = 291/13 = 22·38 cents
The EPS figure provides us a measure of total profit per share (after tax and preference share dividends) prior to it has been divided into dividends and retained earnings. Companies are open to choose the proportion of earnings which are paid out in dividends and this is clearly indicated by the dividend cover which is measured as
Dividend per share
Earnings per share
The table demonstrates dividend yield but not the dividend value required to compute the cover. The value is able to be calculated by multiplying the share price by the percentage dividend yield.
That is Dividend value = Dividend yield (%) × Share price
For Spin this provides a dividend per share of (0·023) × (187) = 4·3 cents. For Axis the dividend per share is (0·021) × (291) = 6·11 cents.
This signifies that combining the information on EPS and dividend per share the dividend cover for Spin and Axis can be calculated as
Spin = 8·86/4·3
= 2·06
Axis = 22·38/6·11
= 3·66
An substitute method of calculation is:
Dividend cover = (100/P/E ratio)/ dividend yield
For Spin = (100/21·1)/2·3 = 2·06
For Axis = (100/13·0)/2·1 = 3·66
The lower cover for Spin point to that they have chosen to pay out more of their earnings in dividends. The figure of close to 2 for cover denotes that almost half of earnings have been paid out in dividends. For Axis the figure of over 3 for cover denotes that less than one third of their earnings have gone in dividend payments.
The degree to which a company retains profit is indicative of its desire to re-invest to maintain or increase future profits. This signifies that as a general rule, the higher the dividend covers for a business the greater the potential for future capital growth. The level of dividend cover differs widely between industries because the scales of investment required maintain/improve production varies across industries. As a result investors should take care to make sure that they only compare the dividend cover of companies that are in the same sector.