Unforeseeable Payout Ratios: What’s the Way Forward? [Podcast]

Subscribe

Payout ratios may appear simple, yet they can be misleading. Mike and Vero delve into why the common guideline of “<80% = safe” could be deceptive, especially when there are earnings variations, exceptional dividends, or a concentration on capital-intensive sectors. Learn when the EPS payout ratio matters, when to prefer cash payout, DCF, or FFO/AFFO, and how to understand challenging numbers such as negative or 200% payouts without concern. Don’t Get Confused by Stock Price: Watch the Full Webinar Replay Now (Free)!

You’ll Discover

Why payout ratios can mislead savvy investors

The conventional EPS payout ratio (dividends paid ÷ EPS) serves as a seemingly straightforward indicator, but discrepancies in a single quarter can distort both dividends paid (due to special dividends) and EPS (due to unexpected factors like impairments, PCLs, restructuring, FX). Depending solely on a rigid guideline such as “<80% = safe” might misrepresent high-performing investments or unduly warn against strong payers during temporary difficulties. Align the ratio with the business model Utilize the approach that reflects how cash is actually produced and allocated: Capital-heavy firms / Telcos: emphasize cash payout (cash flow post-sustaining capex) above EPS payout, which may be inflated by non-cash amortization. Pipelines & midstream: management targets DCF payout goals; since it’s not GAAP, evaluate against the company’s history and guidance, not compared to rivals. REITs: utilize FFO/AFFO payout (cash flow from properties after maintenance). Non-GAAP metrics vary by issuer—focus on historical performance and trends rather than inter-company comparisons. Context matters before conclusions Rapidly evaluate earnings: press release ? investor presentation ? financials ? call/transcript. Identify what influenced the ratio (impairments, PCLs, asset sales, timing of increases), measure the effect, and determine if the factor is short-term (12–24 months) or structural (business model decline, financial stress, regulation). Expectations are crucial: a “bad” headline may be “good” relative to consensus and vice versa. Assessing extremes (-% or >100%)—a quick checklist

What has changed? One-time charges or actual operational losses?

Cash perspective: Is cash generation stable after covering capex?

Timing discrepancies: Special dividends, asset sales prior to reinvestment, or mid-year dividend hikes can misrepresent payout.

Clarity: Does guidance or order books indicate a return to normalcy in 4 quarters? If not, consider it a risk—not merely noise.

The trend is your ally (and an early warning)

Review multi-year payout trends instead of isolated cases. A consistently rising payout along with flat or falling revenue and EPS signifies decreased financial flexibility; future dividend growth may decelerate, plateau, or decline. Conversely, a high yet stable payout combined with increasing revenue/EPS and strategic reinvestment can be sustainable for mature, cash-rich firms.

Use industry benchmarks—correctly

“Normal” payout ranges differ by sector and capital requirements. Compare similar firms (e.g., life insurers vs. P&C are not directly comparable). Start with the company’s past five-year data, then analyze 2–3 direct competitors to identify true outliers.

When >100% signals a genuine red flag

Multiple warning indicators: payout surpasses 100% and the Dividend Triangle (revenue, EPS, dividend growth stagnating) shows weakness, debt metrics deteriorate, guidance is lowered, and buybacks cease. These often lead to cuts. One challenging quarter typically does not.

A non-alarmist instance—why Mike sold ENB

The decision wasn’t based on “DCF vs. EPS payout.” It was about strategic alignment (targeting around 5%+ dividend growth; ENB shifted to approximately 3%) and interest rate sensitivity (increasing debt costs in a capital-heavy environment). The takeaway: payout metrics are tools—not a core foundation.

A practical workflow you can replicate

Begin with the Dividend Triangle (multi-year revenue, EPS, dividend trajectories).

Draft your thesis (strategy, growth opportunities, competitive edge).

Assess the dividend profile (growth rate + payout level & trend) using the suitable ratio for the business.

Cross-examine with quarterly documents for clarity.

Determine: temporary fluctuation (hold/accumulate) vs. permanent decline (trim/exit).

Bottom line: The payout ratio is a contextual metric. Employ the relevant version, evaluate the trend, and let the Dividend Triangle and your written thesis steer decisions—not just a single percentage.

Related Content

We analyze this with four case studies of companies maintaining a payout ratio above 100%, yet remaining secure.