Suppose a company has paid semiannual dividends of €3 a share over the prior 2 years and €2.75 for 4 years prior. During that 6-year period, earnings and capital expenditure needs have shown considerable interim variability, and dividend payout ratios have ranged from 55 to 86 percent, with an average of 65 percent. In the current six-month period, suppose that 8 million shares are issued and outstanding and that earnings are anticipated to be €28 million. The company has €5 million in planned capital spending for the six-month period (representing positive NPV projects). The company’s long-term target capital structure is 50 percent debt and 50 percent equity. Based on the facts given, the most likely dividend per share for the current six-month period is:
If you take the average payout rate of 65%, then using €28 million net income and 8 million shares you’d get €2.28. However, their pattern seems to be to raise the dividend when they believe that they can sustain it, then to sustain it; there’s no evidence that they drop it, even when sustaining it results in a considerably higher payout ratio.
However, €3.19 seems to high: it represents a 91% payout ratio – outside their historic range – and there’s insufficient evidence (in my view) that they feel that it’s sustainable.
