Cash Dividend Payout Ratio

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Definition

Proportion of free cash flow (after preferred dividends) that is paid as dividends to common shareholders. If Microsoft generates 50 million in operating cash flow, has capital expenditures of 20 million, pays preferred dividends 10 million and pays common dividends 5 million, Microsoft has a cash dividend payout ratio of 25%. 5/(50-20-10)

Because net earnings can be easily manipulated and cash flows are harder to manipulate, this ratio is useful to analyze cash flow being paid in dividends. If this number is consistently high, or greater than 1, it indicates that the firm is paying out more in dividends than it is receiving in actual cash.

For more information on evaluating valuation multiples similar to this, please see our original white paper research : Making Sense Of Valuation Multiples.

Formula

Cash Dividend Payout Ratio = Common Stock Dividends / (Cash Flow from Operations - Capital Expenditures - Preferred Dividends Paid)

Note: Payout ratios are normally calculated as Dividends/Net Income. To get a more accurate picture of cashflow available to shareholders, the above formula can be used instead.

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