Shareholder Return Coverage Ratio
Welcome to the Value Sense Blog, your resource for insights on the stock market! At Value Sense, we focus on intrinsic value tools and offer stock ideas with undervalued companies. Dive into our research products and learn more about our unique approach at valuesense.io.
Explore diverse stock ideas covering technology, healthcare, and commodities sectors. Our insights are crafted to help investors spot opportunities in undervalued growth stocks, enhancing potential returns. Visit us to see evaluations and in-depth market research.
What is Shareholder Return Coverage ratio?
Shareholder Return Coverage ratio compares the earnings to the total returns (dividends and buybacks) provided to shareholders. It assesses the sustainability of these returns.
How do you interpret Shareholder Return Coverage ratio?
Shareholder Return Coverage ratio compares total returns to shareholders against earnings, helping assess whether the company can maintain or increase its dividend and buyback programs over time.
How to Calculate Shareholder Return Coverage ratio?
The formula for calculating this ratio typically divides the company’s free cash flow or net income by the total amount paid out as dividends and share buybacks.
Shareholder Return Coverage Ratio=Free Cash Flow or Net Income/Dividends Paid + Share Buybacks
where
- Free Cash Flow or Net Income: The funds available after operational costs and capital expenditures.
- Dividends Paid + Share Buybacks: The total amount returned to shareholders in the form of dividends and share repurchases.
Why is Shareholder Return Coverage ratio important?
This ratio is important as it allows investors to evaluate whether the company can sustain its shareholder return policies without depleting its cash reserves or resorting to borrowing. It also reflects the company's financial health and its ability to maintain or increase shareholder returns over time.
How does Shareholder Return Coverage ratio benefit investors?
Investors can use this ratio to determine if a company can maintain its dividend payments and share buybacks sustainably. A high ratio suggests that the company has strong financial health and can continue rewarding shareholders without taking on excessive debt or reducing its liquidity.
Using Shareholder Return Coverage ratio to Evaluate Stock Performance
Stocks with a strong Shareholder Return Coverage Ratio tend to have stable or growing returns to shareholders, which can enhance stock performance over time. Investors may favor companies with high ratios as they indicate financial health and a commitment to rewarding shareholders.
FAQ about Shareholder Return Coverage ratio
What is a Good Shareholder Return Coverage ratio?
A ratio greater than 1 is generally considered good, as it indicates the company has enough free cash flow or net income to cover its dividends and buybacks without external financing.
What Is the Difference Between Metric 1 and Metric 2?
Shareholder Return Coverage Ratio includes both dividends and share buybacks in its calculation. Dividend Coverage Ratio only considers the company’s ability to cover dividend payments.
Is it bad to have a negative Shareholder Return Coverage ratio?
A low or negative ratio suggests that the company may not be generating enough cash to cover its shareholder returns, which could lead to cuts in dividends or buybacks. This could be a warning sign for investors, particularly those focused on income.
What Causes Shareholder Return Coverage ratio to Increase?
The ratio increases when the company generates higher free cash flow or net income, or when it reduces the total amount spent on dividends and buybacks.
What are the Limitations of Shareholder Return Coverage ratio?
This ratio does not account for future cash flow needs, investments, or other obligations. It is also limited by the fact that it focuses on short-term shareholder returns, without considering the company’s long-term growth strategy.
When should I not use Shareholder Return Coverage ratio?
The ratio is not useful for companies that do not engage in regular share buybacks or dividend distributions. It is also less relevant for early-stage companies that prioritize growth over returning capital to shareholders.
How does Shareholder Return Coverage ratio compare across industries?
This ratio tends to vary by industry. Industries with high free cash flow and stable earnings, such as utilities or consumer staples, tend to have higher coverage ratios, while sectors that reinvest heavily in growth, like technology, may have lower ratios despite strong financial health.
Explore More Investment Opportunities
For investors seeking undervalued companies with high fundamental quality, our analytics team provides curated stock lists:
📌 50 Undervalued Stocks (Best overall value plays for 2025)
📌 50 Undervalued Dividend Stocks (For income-focused investors)
📌 50 Undervalued Growth Stocks (High-growth potential with strong fundamentals)
🔍 Check out these stocks on the Value Sense platform for free!