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Dividend payout ratio Essay

Investors have varying preferences in regards to the type of returns and gains expected from their investments. As postulated by Gibson (p 337), the choice between capital and revenue gains depends on the intrinsic characteristics of the investors. As a result, some investors will prefer cash dividends to stock dividends. As a result, the dividend payout ratio acts as a measure of attractiveness to the investors for any company. High payout ratios are attractive to investors who prefer revenue gains while a low payout ratio enables companies to retain earnings for expansion. Return on shareholders’ funds

Also known as the return on equity (ROE), this ratio portrays the performance of the company from the point of view of the shareholders (Wiehle, 102). Investors are interested in knowing the portion of the income which will accrue to the company. In spite of investor preference in relation to capital or revenue gains, this ratio displays the actual gain to their investment. According to Pepsico Inc: Key Records (web, 2010), the ROE for the year was 37. 3% compared to an industry average of 30. 2%. Owing to the considerable level of earnings accruing to investors PepsiCo emerges the most attractive investment.

Earnings per share

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Wiehle (p 190) outlined that the earnings per share

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(EPS) acts as a measure of attractiveness to investors owing to the fact that investors are concerned about knowing the amount of the earnings which will accrue to each unit of investment in the company. As a result, the earnings per share

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display the returns accruing to each unit of investment in the form of equity. This emanates from the fact that not all earnings accrue to shareholders. The EPS is displayed by the following formula, and PepsiCo’s EPS for the year was 16. 0 (Pepsico Inc: Key Records, web, 2010).

High earnings per share

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imply that the shareholders rewards for investing in the company are significantly high. As a result, most investors will prefer to invest in companies with high earnings per share

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. Conclusion The above outlined financial ratios affirm the notion that PepsiCo Inc. is a favorable investment for most rational investor who aims acquiring financial gains from their investment. In spite of the fact that financial ratios are not a conclusive indicator to the actual scenario of an organization owing to the substantial number of assumption made, it still remains the most appropriate way of gauging the performance of a company.

Works Cited Consolidated Statements. “Consolidated Statements of Income”. PepsiCo 2009 Annual Report . 6 February 2010. Web. 2 June 2010. http://www. pepsico. com/annual09/financialContent_Statements. html Gibson, Charles, H. “Financial reporting and analysis” California: Cengage Learning, 2009, p 297-335 Pepsico Inc: Key Records. “Money”. MSN. 2010 Web 2 June 2010 http://moneycentral. msn. com/investor/invsub/results/compare. asp? Page=FinancialCond ition&Symbol=US%3aPEP Wiehle, Urlich, et al. “100 US GAAP Financial Ratios”. Cometis AG, 2005, p99-210

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