Price-Dividend Ratio (PDR)

Price-Dividend Ratio PDR P/D Ratio Investment Value Dividends Market Price
The Price-Dividend Ratio (PDR), also known as the Price/Dividend (P/D) ratio, is the current market price of a company's share divided by the dividend per share for the previous year. It measures the investment value of the share.
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What is the Price-Dividend Ratio (PDR)?

The Price-Dividend Ratio (PDR) is a financial metric used to evaluate the investment value of a company’s shares by dividing the current market price per share by the dividend per share for the previous year. This ratio helps investors assess how much they are paying for each dollar of dividends received. A higher PDR indicates that investors are willing to pay a premium for the dividends provided by the company, while a lower ratio suggests that the stock might be undervalued relative to its dividend payouts.

Formula

\[ \text{PDR} = \frac{\text{Current Market Price per Share}}{\text{Dividend per Share (Last Year)}} \]

Examples

  1. Company A:

    • Current Market Price per Share: $100
    • Last Year’s Dividend per Share: $5
    • PDR: \( \frac{100}{5} = 20 \)

    Interpretation: Investors are willing to pay $20 for each dollar of dividends from Company A.

  2. Company B:

    • Current Market Price per Share: $80
    • Last Year’s Dividend per Share: $2
    • PDR: \( \frac{80}{2} = 40 \)

    Interpretation: Investors are willing to pay $40 for each dollar of dividends from Company B.

Frequently Asked Questions

What does a high Price-Dividend Ratio indicate?

A high Price-Dividend Ratio indicates that investors are willing to pay more for each dollar of dividends. This could imply that the company has strong growth prospects, high perceived stability, or an industry-leading position. However, it could also suggest that the stock is overvalued.

Why is the Price-Dividend Ratio important?

The Price-Dividend Ratio helps investors compare the dividend-paying potential of different companies. It is particularly useful for income-focused investors who seek to understand the value they are getting for the dividends received.

How does the Price-Dividend Ratio differ from the Price-Earnings Ratio (P/E)?

The Price-Dividend Ratio focuses on the relationship between share price and dividends, while the Price-Earnings Ratio (P/E) focuses on the relationship between share price and earnings. Both ratios provide different insights into the value and potential return on an investment.

Can the Price-Dividend Ratio be negative?

No, the Price-Dividend Ratio cannot be negative because both the market price per share and dividend per share are always non-negative values.

How frequently should the Price-Dividend Ratio be evaluated?

The Price-Dividend Ratio should be evaluated regularly, ideally on an annual basis, or whenever there are significant changes in the share price or dividend payments.

  1. Dividend Yield: The annual dividend per share divided by the current market price per share, expressed as a percentage.

  2. Price-Earnings Ratio (P/E): A valuation ratio calculated by dividing the current market price per share by the earnings per share (EPS).

  3. Dividend Payout Ratio: The proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage.

Online References

Suggested Books for Further Studies

  • The Intelligent Investor by Benjamin Graham
  • Security Analysis by Benjamin Graham and David Dodd
  • Common Stocks and Uncommon Profits by Philip Fisher

Accounting Basics: “Price-Dividend Ratio (PDR)” Fundamentals Quiz

### What does PDR stand for in accounting? - [ ] Price-Demand Ratio - [x] Price-Dividend Ratio - [ ] Price-Distribution Ratio - [ ] Price-Deposit Ratio > **Explanation:** PDR stands for Price-Dividend Ratio, which is a measure of the investment value of a company's share based on its dividend payouts. ### How do you calculate the Price-Dividend Ratio? - [ ] Market Price per Share / Dividend Yield - [x] Market Price per Share / Dividend per Share (Last Year) - [ ] Dividend per Share / Market Price per Share - [ ] Market Capitalization / Dividend Payout > **Explanation:** The Price-Dividend Ratio is calculated by dividing the current market price per share by the dividend per share for the previous year. ### What does a high PDR typically indicate? - [ ] Lower valuation of the company's dividends - [ ] Less interest in the company's shares - [x] Higher valuation of the company's dividends - [ ] Decreasing dividend payouts > **Explanation:** A high PDR typically indicates that investors are willing to pay a premium for each dollar of dividends, suggesting a higher valuation of the company's dividends. ### Which of the following is NOT a related term to PDR? - [ ] Dividend Yield - [x] Return on Assets (ROA) - [ ] Price-Earnings Ratio (P/E) - [ ] Dividend Payout Ratio > **Explanation:** Return on Assets (ROA) is not directly related to PDR. However, Dividend Yield, Price-Earnings Ratio (P/E), and Dividend Payout Ratio are terms closely related to the evaluation of dividends and stock value. ### What might a very low PDR suggest to an investor? - [ ] The stock is likely overvalued - [ ] Investors are eager for high dividends - [x] The stock might be undervalued relative to its dividends - [ ] High earnings per share > **Explanation:** A very low PDR might suggest to an investor that the stock is undervalued relative to its dividends, indicating a potential investment opportunity. ### Which element NOT needed to calculate the Price-Dividend Ratio? - [ ] Current Market Price per Share - [ ] Dividend per Share (Last Year) - [x] Earnings per Share (EPS) - [ ] Both a) and b) > **Explanation:** Earnings per Share (EPS) is not needed to calculate the Price-Dividend Ratio. Only the current market price per share and dividend per share (last year) are required. ### The PDR helps investors particularly who are focussed on what type of return? - [ ] Capital gains - [ ] Earnings growth - [x] Dividend income - [ ] Asset appreciation > **Explanation:** The PDR helps investors particularly who are focused on dividend income because it provides insights into the value they are getting for the dividends received. ### What occurs if the dividend payout remains constant but the share price increases? - [x] PDR increases - [ ] PDR decreases - [ ] PDR remains constant - [ ] PDR becomes zero > **Explanation:** If the dividend payout remains constant but the share price increases, the Price-Dividend Ratio (PDR) will increase. ### Can a company with no dividends have a calculable PDR? - [ ] Yes, always - [x] No, because the denominator will be zero - [ ] Yes, but it's uncommon - [ ] Yes, but it requires adjustments > **Explanation:** A company with no dividends cannot have a calculable PDR because the denominator (dividend per share) would be zero, making the ratio undefined. ### What primarily affects the periodic evaluation of the PDR? - [ ] Changes in bond rates - [ ] Changes in market trends - [x] Changes in share price or dividend payments - [ ] Company announcements > **Explanation:** The periodic evaluation of the PDR is primarily affected by changes in the share price or dividend payments.

Thank you for exploring the Price-Dividend Ratio (P/D Ratio) in depth. Continue advancing your financial literacy and investment analysis skills!

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Tuesday, August 6, 2024
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