Business, Legal & Accounting Glossary
Earnings per share divided by dividend per share.
A company’s dividend cover is the number of times that its dividends could be paid out of its annual profits after tax.
The ratio between a company’s earnings (net profit after tax) and the net dividend paid to shareholders, calculated as earnings per share divided by the dividend per share.
So if a company has earnings per share of 8p and it pays out a dividend of 2.1p, the dividend cover is 8 / 2.1 = 3.80
Generally speaking, a ratio of 2 or higher is considered safe (in the sense that the company can well afford the dividend), but anything below 1.5 is risky. If the ratio is under 1, the company is using its retained earnings from a previous year to pay this year’s dividend.
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This glossary post was last updated: 26th April, 2020 | 0 Views.