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Dividend payout ratios don’t have to be so perplexing

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Where can I find accurate dividend payout ratios for companies? The numbers I see on investing websites don't always agree.

Knowing a company's payout ratio is important because it will help you determine the safety of the dividend and its prospects for growth. Unfortunately, there is no standard definition of payout ratio. Depending on the company or industry, it can be calculated in different ways – as a percentage of earnings, cash flow or adjusted cash flow, for example – which may explain why you have noticed discrepancies in the payout ratios you come across.

Moreover, what is considered an acceptable payout ratio varies depending on the type of business and the company's stage of growth. Young, fast-growing companies tend to pay out very little – if anything – in dividends, because they can earn a higher return by reinvesting cash internally in the business. At the other end of the scale, mature companies – such as pipelines, utilities and telecoms – generate relatively predictable earnings and strong cash flows that allow them to pay out a higher percentage of their profits as dividends. If you want to be sure you're getting an accurate payout ratio, there is no substitute for going directly to the source. Many companies – particularly those that make it a priority to pay an attractive dividend that grows over time – discuss the payout ratio in earnings releases or elsewhere on their website because they know shareholders are looking for this information.

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A good example is the utility operator Fortis (FTS). If you go to the company's main investor-relations web page, you'll see a chart titled "dividend information" that shows annual dividends paid since 2006, along with the payout ratio for each year. A note beneath the chart indicates the payout ratio is "adjusted for non-recurring items" – in other words, it's the annual dividend expressed as a percentage of earnings per share after stripping out one-time factors. Fortis's payout ratio was 66 per cent in both 2015 and 2016, which is reasonable for a utility company with largely regulated and relatively predictable earnings.

Some companies specify a target range for their payout ratio. Telus (T), for instance, aims to pay out "65 [per cent] to 75 per cent of prospective net earnings" – that is, earnings for the next fiscal year. The company's 2016 "management's discussion and analysis" – available on its website – includes a detailed discussion of the payout ratio, which was 77 per cent based on adjusted earnings for the previous 12 months. Although the payout ratio was above its target on a trailing basis, "we estimate that we will be within our target guideline on a prospective basis," Telus said.

Another example is Enbridge (ENB), which aims to pay out 50 per cent to 60 per cent of "available cash flow from operations," or ACFFO – a range it says provides "a healthy balance between returning income to shareholders and retaining income for reinvestment in new growth opportunities." ACFFO is a measure of operating cash flow adjusted for certain items, including payment of preferred-share dividends, maintenance capital expenditures and non-recurring factors.

Real estate investment trusts use a similar cash-flow measure called funds from operations (FFO) or the more stringent adjusted funds from operations to calculate payout ratio. Canadian REIT (REF.UN), for example, has one of the lowest payout ratios in the industry at 56 per cent of FFO in 2016 (you can find this number in the "investor presentation" available on CREIT's website). Thanks in part to its conservative payout ratio, CREIT has been able to raise its distribution regularly over the years.

Finding information about a company's payout ratio often requires some digging. If you can't find it in the company's annual report, quarterly results, investor presentation or elsewhere on the company's website, try checking transcripts of quarterly conference calls. Some companies post conference-call transcripts (I wish more companies would do this as it's a great service for investors), but for others you might have to go to a website such as A Google search is another way to find transcripts.

If all else fails, I suggest you e-mail the company's investor-relations department and ask what the payout ratio is and how it is calculated. Most companies will be more than happy to help. If you're considering a dividend stock investment, the payout ratio is a critical piece of information to know.

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More


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