The income statement is one of the three main financial statements used by companies to report their results. The income statement shows you the income of a business and subtracts all the various expenses incurred in order to arrive at the net income, or profit.
Dividends paid to common shareholders are not an expense; therefore, they are not listed anywhere in the income statement. On the contrary, since they are a means by which cash can flow out of a business, they are listed in the statement of cash flows in the financing section. And since dividends are subtracted from net income to calculate retained earnings, they are also listed in the equity section of the balance sheet. Thus, the income statement is in fact the only one of the three main financial statements that does not list the dividends paid.
That said, if a company has a consistent payout ratio (percentage of profits paid out as dividends), you can get a rough estimate of the dividends it will pay out to shareholders.
Estimate of dividends per share from the income statement
In order to estimate the dividend per share, you must first locate the profit or loss in the income statement. This is usually the last item in the income statement, which is why it is called “bottom line”. Then divide that amount by the total number of shares outstanding, which you should be able to find in a stock quote. By dividing the net income by the outstanding shares, you will get the net income per share.
Then multiply that amount by the typical business payout ratio, converted to a decimal number. So a 50% payout ratio would be 0.5. This will give you the approximate annual dividend. If you want the quarterly dividend, just divide that amount by four.
For example, let’s say that a particular company has historically paid between 40% and 46% of its net income in the form of dividends. Using the midpoint of this range, you can use 43% as a typical payout ratio.
If the company has earned $ 10 million and has five million shares outstanding, our formula shows net income of $ 2.00 per share. Based on the typical payout ratio of 43%, we can estimate the dividend for this company at $ 0.86.
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