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Earnings vs. Dividends

June 27, 2013

It’s almost June 30th, which means that 2nd quarter earnings are right around the corner just in time for the 4th of July weekend. Now what does that mean exactly? And what exactly does earnings per share or (EPS) mean?

Earnings is a pretty straight forward concept – earnings represent the U.S. GAAP (general accepted accounting principles), after tax income that the corporation has earned for the period in question. 2nd quarter earnings represents the income earned by the company for the months April – June, assuming that the company uses a calendar (Jan-Dec) business year.

Earnings per share, (EPS) takes it one step further: EPS is the earnings available to common stockholder (there are different kinds but common stock is the “regular” stock that we hear discussed about on the nightly news). To get EPS, you take the earnings for the period in question and divide it by the number of shares outstanding. Example time:

Company ABC has earnings of $100 million for the 2nd quarter, and 100,000,000 shares of stock outstanding. The EPS is 100,000,000/100,000,000 or $1/share. This doesn’t mean that you get $1 for every share you own – it’s a metric to help show the profitability of the company.

Dividends represent the cash that each common stockholder gets: this is measure of the cash flow (which is not the same as income) that is assigned to each share of outstanding common stock. Example time:

Company DEF announces a dividend of $0.25 per share to be paid July 1st 2013. If you own 1,000 shares of DEF you will receive $250 in dividends.

EPS and dividends are both useful metrics that tell different parts of the same story.

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