
Reference 
2000 
1999 
Dividend per share (Rs ) 
1 
8 
8 
Price per share (Rs.) 
2 
40 
50 
Dividend yield ratio 
3=1/2 
0.20 
0.16 
Dividend yield (%) 
. 
20% 
16% 
The dividend yield (%) serves a useful purpose. It
provides a benchmark in evaluating alternative options for investments.
For example, any investor will find the above yields to be competitive
when comparing it with other scrips or evaluating schemes offered by
commercial banks.
Dividend payback:
In addition to dividend yield, would users of
financial information benefit from knowing how long it will take, in
terms of a time frame, to recover the amount invested at the going
closing rates?
The financial yardstick used to measure this data is
called 'dividend payback'. It expresses the number of years in which the
dividends paid to the shareholders will equal the price of investment,
assuming that the company continues to maintain the latest level of
dividends in the forseeable future.
Simply put, to find out dividend payback, the price
of a stock is treated as a 'cash outflow' and 'dividends' as 'cash
inflow'. The payback is computed by taking cash outflow (price per
share) and dividing it by cash inflow (dividend per share). In other
words, dividend payback is a point where dividends equal price, in
absolute terms.
The stunning aspect of 'dividend payback' is that it
requires no more information than what is required for 'dividend yield'.
In fact this piece of information comes embedded in dividend yield
figure.
In case of Fauji Fertilizer, it will be computed as
follows

Reference 
2000 
1999 
Dividend per share (Rs) 
1 
8 
8 
Price per share (Rs.) 
2 
40 
50 
Dividend payback (years) 
3=2/1 
5 
6.25 
Putting it all together:
Dividend yield serves as a basic benchmark for
comparing yields from various options of investments. It relates
dividend to the stock price, and expresses the result in the form of a
ratio or percentage.
The information used for finding 'dividend yield' can
be used to compute 'dividend payback'.
In a pyramid form the above relationship can be
stated as follows:
1
Dividend payback Dividend yield
The above means that dividend payback= 1 by dividend
yield.
In other words, dividend payback is the reverse of
dividend yield. The dividend payback can be computed simply by taking
the number one and dividing it by dividend yield.
In case of Fauji Fertilizer Company Limited, the
dividend payback will be computed as follows:

2000 
1999 
Dividend yield (%) 
20% 
16% 
Dividend yield ratio 
0.20 
0.16 
Dividend payback (years) 
5* 
6.25 
* Unity (i.e the number 1) divided by yield ratio, 1
by 0.20. Note that time value of money is ignored in computation of
payback.
Practical application:
We will now compute 'dividend yield' and 'dividend
payback' for some popular stocks listed on Karachi Stock Exchange, using
closing rate quoted in newspapers on 31 July 2001. The dividend data is
on 'per share' basis based on latest year ended.
Scrip 
1 
2 
3=1*2 
4=2/1 

Close
Rs. 
Dividend
Rs. 
Payback
(years) 
Yield
(%) 
Shell Pak 
218.95 
16.50 
13.26 
7.54 
PSO 
124.10 
10.00 
12.41 
8.06 
Adamjee Insurance 
41.25 
3.00* 
13.75 
7.27 
EFU General Insurance 
27 
3.583* 
7.54 
13.27 
Fauji Fertilizer 
34.65 
8.00 
4.33 
23.09 
Engro Chemicals 
51.05 
8.50* 
6.00 
16.65 
Lever Brothers 
730 
46.40** 
15.73*** 
6.36 
Notes to the Table:
*Normally only cash dividend is taken for computing
dividend yield. However in our opinion, stock dividend is also an
indirect distribution of cash to shareholders. For correct analysis,
stock dividend is added to the cash dividend for computing 'yield'.
For Adamjee, the distribution was 15% cash and 15%
stock. For EFU General it was 22.50% cash and 13.33% stock. Similarly
for Engro Chemicals, the distribution was 70% cash and 15% stock.
**The actual distribution is 232% cash. However, the
face value of each share of Lever Brothers is Rs. 50 and the dividends
have been adjusted accordingly.
***The figures for 'yield' and 'payout' can be
validated easily. Multiply dividend yield by dividend payback and the
result must be equal to one approx. The higher the yield the lower will
be the payback.
In above computations, we have assumed no deduction
of withholding tax, whereas according to Pakistan laws withholding tax
is deducted from the gross dividend, depending on the status of the
payee. For individual shareholder, the rate of withholding tax is 10%.
Proper adjustments therefore should to be made in the above figures for
individual application.
Conclusion:
Dividend yield and dividend payback are two sides of
the same coin. They provide two different angles of looking at the same
information. The use of these ratios in pairs can be helpful in
enhancing the understanding of financial data.