Payout Ratio

Payout ratios in Nordic dividend policies

Nordic listed companies often state their dividend policy as a payout ratio, for example “at least 50% of earnings per share” or “40–60% of comparable net profit”. The policy is a target over time, not a promise for every year. Three things are worth knowing:

• The board proposes, the AGM decides. The dividend for a financial year is usually proposed in the financial statements release in January or February and approved by the annual general meeting in spring. On Finpendium company pages, the dividend table shows which stage each dividend is at.
• Many companies pay in instalments. Paying twice a year, or quarterly, is common in Finland and Sweden. The payout ratio is still calculated on the total for the financial year.
• Company law caps what can be paid. In Finland, for example, a company may distribute only its distributable equity, and it may not make a distribution if it knows, or should know, that it is insolvent or would become insolvent as a result.

How to read the payout ratio

• Look at several years. Companies tend to keep the dividend steady while earnings swing, so the ratio jumps in a weak year. A single year above 100% can be fine if earnings were temporarily depressed; several years above 100% mean the company is paying out more than it earns.
• Compare with cash, not only earnings. Dividends are paid in cash. Dividends divided by free cash flow is a stricter test, because earnings can include non-cash gains and leave out investment needs.
• Check which earnings. Policies often use adjusted or comparable EPS, while the table on this page uses reported basic EPS. A large impairment can push the reported ratio far above the policy range in a single year.
• Count buybacks too. Some companies return cash through share buybacks instead of, or as well as, dividends. The total paid to shareholders is dividends plus buybacks.

The worked example and the table on this page use the dividend proposed or decided for the latest financial year and that year’s reported basic EPS, as published in the company’s financial statements release.

Why payout ratios differ between companies

A mature company with stable demand and modest investment needs, such as a telecom operator or a utility, can pay out most of its earnings. A fast-growing company needs its earnings to fund growth and often pays a small dividend or none at all. Cyclical companies, for example in forestry, metals or engineering, may set a lower target so that the dividend survives a downturn.

A high payout ratio is not a sign of a good investment on its own, and a low one is not a bad sign. What matters is whether the earnings the company keeps are invested at good returns. A company that keeps half its earnings and earns a high return on equity on them can grow its dividend faster than one that pays out everything.

The ratio is not meaningful when earnings per share is negative. A company that pays a dividend after a loss year is paying it from the retained earnings of earlier years.