What Causes Dividends per Share to Decrease?

Dividends per share (DPS) is the sum of all dividends a company pays out over a fiscal year divided by the number of outstanding shares. It is used to share a company’s profits with its shareholders.

Causes of Decreased Dividends per Share

Some of the reasons a company’s DPS may decrease include reinvestment in a firm’s operations, debt reduction, and poor earnings.

Reinvesting Profits

A company may decide to reinvest its profits into the development of new products or core business assets. In this case, although a company retains some of its earnings, this action does not necessarily signal a company is in weak financial health. This reinvestment may lead to a higher DPS in the future.

For example, suppose company XYZ is a technology company that paid a DPS of $1.20 last year. However, for this year, it is planning to decrease its dividend to 60 cents per share to reinvest profits for the creation of a new software product. This reinvestment leads to a decrease in dividends in the short term.

Debt Reduction

A company may also decrease its dividends to reduce its debt.

For example, suppose company ABC has debt it must pay off before the end of next year. Last year, company ABC paid a dividend of $1.50 per share. However, this year, it keeps some of its profits and reduces its dividend to 30 cents per share because it chooses to pay down its debt further. This leads to a decrease in DPS in the short term and may increase it in the long term.

Poor Earnings Performance

Poor earnings also contribute to a reduction in DPS. For example, suppose company ZYX reported a loss this year due to an economic downturn. Last year, ZYX paid a dividend of $2.00 per share. In this case, the company decides to remove its dividend because it does not have profits to disperse to its shareholders.