Question

As a shareholder in Pinnacle, Mrs. Paul is excited about the $1,000 EPS (earning per share) she will soon receive in the form of dividends and she begins to plan her around the world cruise. However, as her broker, it is your job to figure out a way to explain why this is not likely to happen but that she might be able to cruise the Hawaiian Islands for a week.

Be sure to emphasis the difference between earning per share and dividends.

Answer 1

Mrs. Paul is over excited with earning per share of the Pinnacle. There are some difference between earning per share and dividends, Some of them are;

1) Earning per share indicates the profitability of a company out of it's stock where as dividend is the portion of the earnings of a company given to the shareholders.

When is a company is not paying dividend (or low dividend) and they have a good earning per share this means company is investing most of the profit into research, development or improving the service so they can capture market and also wants to grow bigger than competitors. This are like Facebook, google, amazon and Nvidia.

When a company is paying good dividend and earnings per share is not too much different from last year. This means this is a defensive company with not expected too much profit but wants to return shareholders the investment thrown in. Rather than borrowing money from bank to invest on equipment or projects they return the profit to share holders. These are commonly utilities companies. Strong stable companies which pay more dividend than bank interest.

Mrs.Paul must distinguish both earning per share and dividend , apart from that understand how much divindend she is going to get from the company side, and analyse in what circumstances company provides high dividend and less dividend thereby do economic planns in her life.