Dividend Cover

Ratio: Net Income divided by Dividend

The ratio shows the ratio of Profit to Dividends paid. If this number is greater than 1, it means the business has reinvested some profit back into itself – the higher the number the greater the re-investment.

Some companies occasionally pay Dividends greater than their Earnings; this may happen if they take a temporary loss and want to send a signal that the loss does not matter. Failing to pay an expected dividend signals that the company has run into unexpected difficulty, and this will hurt the price of shares. It shrinks the size of the business to pay a dividend greater than earnings, but a high stock price is important if the company wants to raise more capital by issuing shares. The company wants the most money for the fewest new shares issued.

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