What factors lead to a decrease in dividends per share?

Dividends per share (DPS) represents the total dividends paid by a company throughout a financial year divided by the outstanding shares, serving as a means to distribute profits to shareholders.

Causes of Decreased Dividends per Share

Factors leading to a reduction in a company’s DPS include reinvestment in business operations, debt repayment, and underwhelming earnings.

Reinvesting Profits

A company might choose to reinvest its profits into developing new products or enhancing core business assets. While this retains earnings, it does not necessarily indicate financial weakness. Such reinvestment efforts may result in a higher DPS in the future.

For instance, consider technology company XYZ, which declared a DPS of $1.20 last year but plans to cut it to 60 cents per share this year to fund the creation of a new software product. This immediate reduction in dividends stems from the decision to reinvest profits.

Debt Reduction

Companies might lower dividends to alleviate debt burdens.

For example, consider company ABC, which paid $1.50 per share in dividends last year but opts to reduce it to 30 cents per share this year to further pay off its debt. This strategic move can lead to short-term DPS decreases but potentially enhance them in the long run.

Poor Earnings Performance

Diminished earnings also play a role in lowering DPS.